Bassanese Bites: Outbreak – December 21 2020

Global markets

Global equities pushed ever higher last week as the rollout of vaccines and the lingering promise of a U.S. stimulus deal outweighed serious but seemingly now ‘lagging’ news on soaring COVID cases, new restrictions, and slowing economic data. Why worry about new waves of the virus when vaccines will soon solve the problem! Indeed, Wall Street shrugged off a slump in U.S. November retail sales and another leap higher in weekly jobless claims. There’s also talk of a New York lockdown if conditions get much worse over Xmas.

In the UK, London has gone into a pre-Xmas lockdown amid reports of a new and much more contagious COVID mutation emerging. Less surprising, UK-EU trade talks continued, with both sides still at loggerheads.

Notable market moves last week included further weakness in the $US and associated strength in gold and the $A – despite the fact that U.S./growth/technology themes generally did better than non-U.S./value/energy themes last week as COVID concerns were heightened somewhat. Heading into 2021, a weak $US and ongoing rotation into non-U.S./value over U.S./growth is emerging as the consensus trade du jour.

On the basis that COVID concerns will eventually ease this still seems the path of least resistance – especially given the U.S./growth/technology trade has been so popular and so crowded for so long. If so, the $A also seems likely to get even more uncomfortably high – potentially breaking through U.S. 80c next month. The RBA will be powerless to prevent this, especially as rapidly rising asset prices and a strengthening economy argue against expanding the bond buying program in February next year.

[Note: if you are keen on U.S. value, we’ve just launched our S&P 500 equally-weighted ETF – which gives you 0.2% exposure to each of America’s largest 500 stocks, greatly diversifying exposure away from the top-5 stocks which now account for a whopping one quarter of the market-cap based S&P 500 Index. Some further information on the rationale for this ETF is provided here.]

News of a stimulus agreement over the weekend will likely be warmly welcomed by Wall Street to start the week, though it could also be a case of ‘buy the rumour, sell the fact’. The U.S. rollout of the second approved vaccine (Moderna’s) may also further lift spirits, which may well be enough to allow markets to ignore another round of likely weak U.S. economic data (personal spending and jobless claims).

Last but not least, it’s been a while since I mentioned Bitcoin – which is again surging for some reason, seemingly as a hedge against a weakening $US. Although I still question the fundamental merits of cryptocurrencies, two arguments I heard on the weekend that could support further strength are 1) it’s the new-age ‘currency debasement’ trade – over traditional gold – especially for millennials and 2) the more traditional fund managers are lured into trading it, the tougher it will be for regulators to essentially outlaw it later. It also helps that there’s no way to effectively value the stuff, meaning it could easily surge much higher if more momentum traders jump on board.

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