YCC green lights the hunt for yield
Summary: A lacklustre start to the quarter, despite strong lead from Wall Street Asian indices trade off session highs as investors weigh mounting case counts in the US, a sobering warning from Anthony Fauci and a heating war of words between the US and China.
US futures have remained in the red most of the Asia trade, weighing on sentiment across the region. Most regional equity indices trade off session highs, with the heated rhetoric between the US and China dampening sentiment. The shift from the liquidity driven, sentiment fuelled mania that saw US stocks post the best quarter of returns since 1998 is clear as risk assets consolidate, remaining more sensitive to headline news and the virus case count. With respect to the recent consolidation in risk appetite, it does not seem like we are out of the woods and markets are searching for a catalyst to break the cross asset correlations and range bound trade that has characterised the recent weeks.
However, the underlying theme remains intact and continues to support the medium term outlook for risk assets. As we discussed many times, the risk vs. reward has been skewed as investors increasingly view the equity trade on a relative basis, in which case valuation, or the traditional academic conclusions around valuations, are in turn skewed. We are likely to get further confirmation of this dynamic tonight when the FOMC minutes are released and the prospect of YCC draws closer and further green lights the hunt for yield.
This dynamic also continues to propel gold higher, with gold futures briefly trading above $1,800/oz. Alongside the hedge against debt monetisation and central bank largesse is also the added kickers of persistent virus uncertainties and geopolitical tensions which continue to fuel upside momentum in gold. A retest of the all-time highs at $1,924 is on the cards before year end.With respect to the virus uncertainties, Dr. Anthony Fauci delivered a sobering warning overnight, stating daily case counts could more than double if behaviours do not change, and that it is conceivable the US could be recording 100,000 cases a day in a few weeks. A further hindrance for the speed and shape of the economic recovery as even without state-wide lockdowns high frequency mobility and restaurant data shows consumers are self-imposing lockdowns. The added uncertainties flatten the initial bounce back via pent up demand, as consumers will continue to alter behaviour due to economic uncertainty and job insecurities even as restrictions are eased, thus weighing on the recovery as re-openings for many states are paused or wound back. And then further entrenches the expected plateau in activity post the initial bounce back, as the lagged effect of persistently high unemployment, job losses and job insecurities/reduced hours worked weighs on consumer behaviour, spending and for businesses, operating revenues.