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Markets celebrate return to normalcy

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By Hussein Sayed, Chief Market Strategist at FXTM

The US presidential race is finally over. Joe Biden has been elected the 46th president of the United States with the promise to restore political normality and put an end to four years of unpredictability.

Equities are celebrating the outcome, with the MSCI All-Country Index heading towards a new record and the S&P 500 futures rising 1.7% following a 7.32% rally last week.

While the control of the US Senate is still to be determined, markets are reacting as if Republicans will continue to hold this part of Congress. If this is true, taxes are likely to remain at current low levels and interest rates will stay near zero for a long time.

That is the best environment for growth stocks, particularly the tech sector. Hence, they are continuing to outperform the broader market.

With expectations of a massive stimulus package lowered and the Fed now the ‘only player in town’, US bond yields will continue to come under pressure.

The Dollar won’t benefit from widening yield spreads and that has dragged the DXY to its lowest levels since early September. Significant moves have also been seen against the Yuan. The Chinese currency is trading at its highest level since June 2018. The narrative now is that Biden will take a softer approach against China, or at least a more predictable one.

A combination of fewer trade tensions and low US interest rates is encouraging inflows into high beta currencies. The Australian Dollar is hovering around 0.73, while the New Zealand Dollar reached 19-month highs.

Assuming no big surprises interrupt the market’s celebration, this trend is likely to continue until year end and possibly beyond. When the party is over, investors will realise that corporate valuations are extremely high and we’re still dealing with a health crisis.

Sky high valuations can still be justified in the short run given that very few investment alternatives are available. Stocks are still cheaper than bonds from a pure valuation perspective. But it is the health crisis that will determine the trajectory for assets in 2021 and how fast the global economy will recover going forward.

Gold could possibly be a good hedge against those unknown factors and I wouldn’t be surprised to see the precious metal trading above $2,000 by year-end.

Given where we stand now, it seems highly unlikely that we will see asset returns anything near the Trump or Obama era over the next four years, whatever Biden does. Assets are priced for perfection and it requires positive surprises to keep the momentum going.

 

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