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Editor's Note: Hamish Risk | October 6, 2020
The latest twists and turns in the US presidential race are naturally a focus for investors, and we all know what the polls are telling us, and we all wonder how that will change in the coming weeks as we monitor the recovery of President Trump and the level of influence he can have in turning around the current sentiment they reflect. Clearly passing a phase 4 stimulus bill is the elephant in the room, because getting government cheques out in the mail will be a winner, just as mail ballots are coming in (or getting lost in Wisconsin rivers, or ditches). However, as Cowen & Co’s DC analysts highlight in today’s briefing, time is running out. If it’s going to get done, it needs to be done now. They remain skeptical of the market’s optimism for a bill to pass in time. Meanwhile, the Pennock Idea Hub observes, regardless of the outcome of the election, the global outlook is changing, with all three major trade blocs suffering. For Ollari Consulting, the dollar is likely to come under pressure whoever wins the vote, and that, accompanied by the eventual return of inflation is likely to turbocharge gold prices. Meanwhile, CrossBorder Capital warns of potential turmoil in the bond market, and Harlyn Research explains why it is dropping bunds as a benchmark.
US fiscal stimulus US presidential elections Cowen Research Group
1. US election – curbing optimism on phase 4Chris Krueger from Cowan & Co’s Washington Research Group has issued a note explaining his scepticism that President Trump will be able to push through phase 4 of his stimulus plan and get cash into voters’ hands before the US election on November 3. As he explains, he is astounded that so many have a high conviction that Trump will succeed given that in order to get cheques out to the electorate in time, the House needs to produce a deal almost immediately. Clouding an already difficult situation for the President is the fact that there is no remote Senate voting system available, says Krueger. This is a problem for Trump’s re-election prospects, he says, given that there are currently six Republican Senators absent either having tested positive for Covid-19 or isolating in quarantine. Krueger also looks at the employment situation in the key battleground states in the wake of recent data, in an attempt to gauge Trump’s chances of victory in each. Florida, a “must-win” state for the President and a key focus for Biden, who was in the state yesterday, presents grim reading for Trump. As Krueger notes, it was the first state to register 3 million unemployment claims, with claims running 4.5 times higher than before the pandemic.
Asset allocation growth versus value Pennock Idea Hub
2. Broken trends –how the world has changedCam Hui at Pennock Idea Hub says the world changed even before news that President Trump had contracted Covid-19, and the recent rise in the dollar and easing inflation expectations are signs of caution that the economic recovery is stalling. All three major trade blocs are facing challenges, he notes, with US growth starting to falter as the limits of monetary policy become evident, European inflation coming in below expectations and the recovery in China remaining uneven. Indeed, Hui says his asset allocation Trend Model signal has been downgraded from neutral to bearish. For US equity investors, he says this suggests that growth stocks will continue to dominate value stocks, at least until the growth and cyclical jitters are over. In a growth starved world, adds Hui, investors tend to flock toward established growth names. Expect growth to dominate value, and large caps to dominate small caps in the current environment, he says.
gold US dollar Ollari Consulting
3. Go gold goChristophe Ollari at Ollari Consulting says gold has benefitted until now from a post-Covid global debasement tailwind, and that will only be turbocharged as it becomes a key hedge against inflation as central banks and governments combine to reflate the global economy. Markets are now in what he calls “phase 2” of the fallout from the Covid-19 pandemic, with ultra-accommodative Federal Reserve monetary policy debasing the value of the dollar and driving “de-americanisation” in a world eager to become less dependent on unpredictable US policy. The problem for investors, says Ollari, is that there is no real fiat currency alternative to the dollar, a point highlighted by recent COFER reserve currency holdings figures from the IMF. That he says explains the strength of the “barbaric relic” that is gold, strength that will only increase as markets move into “phase 3” of the post-coronavirus reaction. “Phase 3” will start properly, says Ollari, when a vaccine enables a smoother journey back to a semblance of normality, and a potential blue sweep in the US presidential elections ushers in a shift towards demand-side economics and a proper partnership between the Fed and the US government. The potential combination of a central bank that keeps nominal yields anchored and a government programme that reflates the economy will be the real boost for gold, he says.
Global liquidity YCC Cross Border Capital
4. Yield Curve Control or coming term structure turmoil?Eerily quiet world government bond markets appear to be ignoring the huge liquidity injections made since March 2020 in the wake of the Covid-19 emergency and the subsequent and on-going economic and stock market rebounds, says Michael Howell at CrossBorder Capital, the global liquidity specialists. He says this has led many to argue that policy-makers are operating, sometimes hidden, YCC (yield curve control) policies. According to Howell, however, the phenomenon most likely owes more to ‘short gamma’ investment strategies than central bank YCC, and with implied volatility at record lows relative to realised volatility, this is a dangerous and unstable mix. As he explains, short gamma strategies have been likened to the risk of picking up pennies in-front of a moving steam-roller, with experience showing investors can make many small gains, but at the risk of a huge loss. Howell therefore warns over potential turmoil in bond markets as volatility returns. Not only is bond volatility strongly mean reverting, he says, but today’s rapid pace of US M2 money supply was the reason YCC ended last time.
Bunds Safe haven assets Harlyn Research
5. Dropping bunds as the benchmarkIt’s time to say good-bye to an old friend and faithful servant, says Simon Goodfellow at Harlyn Research, who says his euro-denominated asset allocation models will no longer use 7-10 year German bunds as their ultimate safe asset. Instead of bunds he proposes using a pan-eurozone index, weighted by the amount of bonds in issue – not GDP as a benchmark asset. The decision, says Goodfellow, is prompted by two considerations. The first is well-known: negative yields, while the second, he says, is more abstruse: they no longer offer the best combination with other fixed income assets to create risk-efficient portfolios. The big issue, as far as Goodfellow is concerned, is the interaction with other fixed income assets. He says that is because – whether politicians in Germany and the Netherlands care to admit it to their voters – something happened in May as the countries of the core of the eurozone effectively agreed to guarantee the credit of the countries of the periphery. The machinery for shared eurozone issuance may not exist yet, says Goodfellow, but debt-mutuality is the assumption on which the ECB’s polices are based. German bunds had a critical role to play in the portfolio when there was a realistic possibility that the Eurozone could break up, he says, and If investors no longer believe this is possible, they should move to a different benchmark.