Updated: Dec 2, 2019
CLIMBING THE WALL OF WORRY
After a brief wobble (which we predicted) at the beginning of the month, US equity markets quickly recovered and managed to achieve a new all time high spurred by an accommodative FED, Trade deal optimism and better than expected corporate earnings. Even European markets joined the party, with the DAX rising around 4%, buoyed by the ECB embarking on another round of QE and the prospect of an orderly Brexit.
The pound had an impressive (short covering) rally from 1.22 to 1.30 after Boris Johnson was able to reach a deal with the EU on the Irish backstop issue which had plagued Theresa May’s negotiations. Despite not getting the deal through UK parliament and requiring another extension until January, he has been able to force an election in December which the market is hopeful the Conservatives can gain a majority in and finally “Get Brexit Done”.
The dollar has been under further pressure as the FED has begun to expand their balance sheet again in what they claim is NOT another round of QE. This injection of USD liquidity to stabilise the repo market has been touted by some as a stealth QE and as such led to further weakness in the greenback.
Bonds have continued to consolidate and precious metals have held above key supports in the face of the risk asset rally. We still like both these defensive assets as part of the portfolio and believe they can still perform well even if equities deliver a year-end rally. With so many investors cautious on risk with the deterioration in economic fundamentals this year, we feel the pain trade in equities may well be higher and would recommend buying 2-3 month call options given that implied volatility is back near year lows.