Holiday Hangover

Traders rang in the new year with much of same spirit that invigorated risky assets throughout the year prior. The push, pull of vaccines and mounting virus spread continues to drive sentiment.

Globally COVID-19 infections pushed through 85 million and daily cases in the US hit a record. The highly contagious mutant strain likely to add to this record in coming weeks. With the pandemic showing few signs of slowing, the end of year party that saw the S&P 500 up almost 20% in the final 2 weeks of the year hit the pause button. Taken in the context of the final trading weeks of 2020, Wall Street’s drop to kick off the year is nothing to write home about. Another factor reminiscent of 2020, dip-buyers are still in play as investors look forward to an improved global economy in 2021 – we are closer to the beginning of the end, than the beginning – with ongoing stimulus spending and vaccine rollouts on top.

In Asia trade, regional indices took a sanguine approach to US stock’s slide and bitcoin recouped some of its losses, following a plunge of as much as 17% on Monday – that, again at the risk of losing perspective, revisited levels of 3 days prior. The parabolic gains across the notoriously volatile crypto space cannot be expected to be anything but correction prone, albeit within a broad move higher.

Traders are now holding out for the next risk event, today’s runoff Senate elections in Georgia, which will determine whether Democrats have a deciding vote  – if the Dem’s win both seat, Kamala Harris will have the deciding vote in Congress.

With a Democrat bent in the Senate the expectations of big fiscal, higher taxes and anti-trust scrutiny for big tech come back in to play. 10-year breakeven rates, now above 2%, are already marching higher, a renewed “blue wave” could further boost this move, along with continued topside break out for longer dated yields.

Should the Democrats take the final 2 run-off seats, the reflation trade should get a fresh kick with an incoming Biden already spruiking the $2000 stimulus cheques back on the table. The USD should continue its precipitous slide with more weight behind the big fiscal and Yellen Treasury/Dem Senate MMT push. And multiple highflyers/long duration stocks could feel the pinch of reflation, higher long bond yields and for big tech, antitrust scrutiny.

In FX, following through yesterday’s move and in keeping with the weaker USD theme, USD/CNH continues to slide blasting through 6.44 and pushing toward 6.42, a lead for $Asia lower. The stronger CNY fix doing little to pushback on bullish yuan traders, along with news the NYSE is scrapping delisting plans for Chinese Telcos.

With the incoming hurdle of the run-off elections and short term froth/retracement risk aside, there is little change in our overarching view of late 2020 that Emerging markets, Asia, Commodities and bets on higher inflation (base effects, pent up demand and supply crunches) are the place to be. Alongside a shift in market leadership toward more cyclically orientated stocks, sectors (energy, materials, industrials, financials and travel and leisure stocks), and geographies, with 2020’s highflyers hampered by rising long end yields. Factors which are a positive catalyst for the cyclically weighted ASX 200 index in the year ahead.

Higher inflation, a synchronised global growth reacceleration and easy central banks against the backdrop of more fiscal stimulus, keeps bears at bay sustaining gains across preferred exposures as economic recoveries resume into Q1.