2020 and the US elections

Macro Analysis

 

Its been several years since I last posted so I dont think it will be that long this time around. Indeed 2020 has been a huge year for financial markets given the corona virus pandemic that has taken place. From having seen the fastest bear market in equities, negative oil prices and unprecedented fiscal support from governments to volatility at 2008 GFC levels. Its been a year of wild swings with a number of outsized options payoffs (*100) and structures (puts and calls) if you were lucky within the commodities, equities and volatility space. Always good to have lottery tickets within the long/short book. 

Going forward the next 1 - 2 years will be important for markets and the global economy with inflation rearing its head. Currently we are still awaiting the result of the US election where a Biden victory will ensue a non-friendly market environment even with fiscal support due to higher taxes, regulation and possible further lockdowns within the USA. Markets have initially rallied off this event but I think the smart money will fade this. A Trump victory and it's off to the races. Lets see how this plays out. See you on the other side!

Financial Markets analysis

Wow. Its been an incredible last few months for the financial markets where we have seen all time highs in the US equity indices as stated in my last post due to investors seeking a higher yield for their capital in addition to large capital outflows to the U.S. A variety of reasons include the uncertainty over Europe with regards to a resolution of the sovereign debt situation and the higher unemployment seen in countries within the EU (an example is Greece). Furthermore there has recently been unrest in various other nations (Turkey) which is starting to drain confidence in the EU framework. 

 In terms of a Macro perspective the fundamentals in the U.S are looking more robust where the NFP data has been steadily improving and consumer confidence reaching levels not seen for a number of years due to rising house prices and the 'wealth effect'. The dollar seems like the place to be and this is expected to strengthen substantially over the next 6-12 months. We have also seen incredible moves in the USDJPY currency pair due to 'Abenomics' where the Japanese have injected large sums of liquidity into their financial system to help weaken their currency in order to drive economic growth (making exports cheaper to foreigners) which has the smell of an underlying theme of currency wars.

US Treasuries yields have also risen substantially whilst prices have decreased (the price/yield inverse relationship) due to the rotation of investors out of bonds and into the equities domain. A low interest rate environment has helped as theoretically the price of borrowing is cheap but the likelihood of an increase in interest rates has increased (US fundamentals are more robust and the headline unemployment rate has ticked down) whilst simultaneously there should be a pickup in volatility. This should be over the summer and into the Q3 period as from a historical perspective there is a high probability whist also the German elections will demonstrate uncertainty and that is one element that financial markets have a disliking of.

Global Macro Report Summary

There has been a clear upward trend since the start of the New Year with equity markets rallying to new highs which haven't been seen for the past 5 years. There has also been a renewed confidence with an upwards tick in the ISM data in the U.S and in China in conjunction with the positive numbers seen in the Non Farm Payrolls data whilst simultaneously consumer confidence has really gathered momentum. Therefore we can say that this macro data is supporting the risk on rally even though U.S GDP in Q4 came in significantly low. We will wait to see what the Q1 data brings us to see if there is support for the upward trend. In addition the beginning of Q1 has seen a robust corporate earnings season where investors have been rotating out of bonds (due to the low yields) in to equities for a more attractive rate of return. Furthermore we have started to see JPY weaken significantly against the USD moving well over 1000 pips due to the 'currency wars' theme being played out in the price action. Just now looking for a correction in equities which happened in 2010 and 2011 then waiting for the markets to make new highs. Let's see how the markets unravel!

Global Analysis

Well 2012 has been quite a year. US ISM came in at 49.5 vs expectations of 51.5. Also recently the final reading of the PMI for China was 51.5 in December according to statements form HSBC holdings and was the fastest pace in 19 months. The last month has also seen the JPY weaken significantly against the USD due to a change in government and the expectations of more aggressive monetary policy form the BoJ.

Shinzo Abe, the prime minister wants an increase in fiscal spending to beat deflation and give a boost to Japanese exports as their goods become cheaper to foreign entities due to the weakening of it's currency.

Also the other big story to look at has been the impending US Fiscal Cliff with automatic taxation and spending cuts on the agenda which should be resolved imminently. This should help give a boost to global markets. This year has seen healthy returns in Greek government bonds and also equity markets. Will 2013 be a year for equities or a safe haven play into the USD? Lets see how the markets play out.

Global Macro Analysis and U.S. elections

So the last few weeks have seen the markets correcting after a rally which has been quite interesting due to the divergence between leading indicators and market performance. From a global macro perspective the world economy is looking in better shape given the ISM figures in China and the U.S were better than expected. In addition the Non-Farm Payrolls data also beat expectations with the slight disappointment in the unemployment rate ticking up slightly but still below the political headline figure of 8%. Consumer confidence in the U.S. has also picked up in the last quarter indicating retail spending is on the increase whilst housing starts and building permits have also been increasing on a month by month basis which has added to positive sentiment going into the Christmas season. Also looking forward to the U.S. elections to see the result of the Obama/Romney presidential race. There could be a situation unfolding where Obama wins but Republicans dominate congress. Therefore the risk of the fiscal cliff becomes slightly greater and could contribute to a slowdown in GDP growth for 2013. Lets see how the scenario unravels! 

Quantitative Easing

Well the last few weeks have been very interesting given the FED decided that now was the right time for QE3 given the stubbornly high unemployment rate which has been stuck above the key figure of 8% since Q1 2009. Furthermore the BoJ has also decided to pump more stimulus into its economy. Could this equal currency wars where countries' are all trying to devalue their currencies at the same time to make their trade more competitive internationally? Who could be the next country to inject liquidity into its system? I suspect China may be next. Therefore with all the liquidity being pumped globally do we expect higher commodity prices? I would think so as governments are taking a Keynesian approach to slower global growth and intervening to try and accelerate economic expansion. I expect gold prices to be supported as an alternative investment and would expect a short term correction and in general the markets as a whole before another rally up to all time highs. Looking forward to the US ISM figure where a number <50 would be a worrying sign and a fourth consecutive month where the manufacturing sector is in a phase of contraction in addition to the non-farm payrolls data. Good luck trading!

U.S. Analysis

This month has been quite interesting. The US ISM came in below 50 again against expectations of a figure above 50 whilst simultaneously the Non-Farm Payrolls data smashed estimates which saw equity markets rally on that particular day. In addition Housing starts and building permits beat expectations. Attached below is a snapshot of figures for this data from Bloomberg. This has led to many portfolios with positive themes with regards to a housing recovery in the US and the potential of going long US Housing stocks. 

In the meantime the big question on investors' minds is whether Ben Bernanke is going to pump liquidity into the system by following through with the much anticipated QE3. There will be a keen eye on the Jackson Hole summit where the Fed Chairman, Ben Bernanke will be speaking and professionals will be looking at the rhetoric and signs of any additional stimulus to the financial system. Given that the unemployment rate has been stubborn for a while, the attention to this summit is particularly high. If comments suggest additional QE we know what is likely to happen given the effects of QE2. Let's see if markets are disappointed or excited?