Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Chief Investment Officer
Summary: Overnight Asia market rallied hard: KOSPI +8%, Nikkei +7% & ASX-100 and Hang Seng + 4%. Meanwhile the US lawmakers continue to dither on the content of the rescue package and have yet to deliver, the US Federal Reserve yesterday came out big yesterday with unlimited QE, new facilities for purchase corporate debt for the first time and much more.
What is our trading focus?
In a hectic trading environment with asset markets gyrating viciously, so much of the market moves up and down in synch, so it is tough to find diversification. Despite the US equity market posting new lows yesterday, market volatility has registered a notable drop and markets bounce again overnight.
What is going on?
The US Federal Reserve – announced its largest effort yet to get ahead of the systemic financial contagion in announcing unlimited QE to purchase treasuries and mortgages, new facilities to purchase corporate debt and commercial MBS, the relaunch of the infamous TALF, bridge loans to companies in trouble and more. A colorful rundown from wolfstreet.com.
The US Congress failed to deliver a package once again as Democrats accused Republicans of favouring businesses over workers and Republicans accused Democrats of opportunism and rolling all manner of Covid19 unrelated “political goodies” into the mix, like CO2 emissions and voter registration issues.
Covid-19: UK has announced a three-week lockdown on activity on par with lockdown in major EU countries. The USA: The Trump administration is increasingly at odds with the recommendations of public health officials, on claims that the US economy can’t afford a total lockdown that extends from weeks to months. Italy: case counts give hope that the outbreak there is peaking.
What we are watching next?
Signs of low in place? – Last 24 hours US Treasuries rallied hard (yields lower), Volatility is coming off panic-highs and we see improvement in sentiment overall. Two things remains to confirm potential for low: A real turn for the dollar and credit spreads to narrow.
EU: talk of “coronabonds” since Friday has been circulating as a kind of backdoor to debt mutualization in the EU. This and the recent large ECB QE have helped put a lid on peripheral spreads, but we need to see a further fiscal commitment across Europe to bring sustained confidence to the euro and EU bond markets and assets.
The US rescue package – the Fed’s new massive All-in-QE has bought the US congress a bit of time by putting a supporting hand under the market, but the rescue package must still arrive and fast to mitigate the risks of the catastrophic reduction in economy activity, employment and confidence.
The USD itself – besides risk sentiment generally, we need to see the USD turning lower soon for a better sense that the tide is beginning to turn – we note EURUSD and USDJPY above, but EM and commodity currencies will prove more sensitive to USD direction here.
Calendar on Monday (times GMT)
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