Growth/Risk Asset Rally Dichotomy To Continue

Happy New Year!  2020 ended with record highs for US stock markets, capping off a solid year for risk assets amid massive and ongoing central bank liquidity injections.  In contrast the dollar index (DXY) ended the year languishing around its lowest levels since April 2018.  The dichotomy between the sharp deterioration in global growth and risk asset performance has widened dramatically.  Given the acceleration in COVID-19 cases over recent weeks and consequent lockdowns, especially in the US and Europe, this divergence is likely to be sustained and even widen further over the next few months, at least until various vaccines finally manage to stem the damage.

Two of the biggest stumbling blocks for markets over recent weeks/months have been US fiscal stimulus and Brexit.  Both have now passed with last minute deals, setting the scene for a clearer path in the weeks ahead though political obstacles have not disappeared by any means, with the Georgia Senate run-off elections scheduled for Tuesday.  The outcome will be crucial for control of the US Senate with Democrats needing wins in both races to take over. However, the races are too close to call according to polls. Separately the US Congress will meet on Wednesday to declare the winner of the Presidential election. 

On the data and events front the week begins with an OPEC+ meeting tomorrow, with officials deliberating on whether to expand output by up to 500k barrels.  There are also a series of December Markit manufacturing purchasing managers indices (PMI) tomorrow including in various countries in Asia as well as the release of the Caixin manufacturing PMI in China.  US data will take centre stage with the release of the ISM manufacturing survey (Tuesday), Federal Reserve FOMC minutes (Wednesday) and non-farm payrolls (Friday).  Overall, markets are likely to begin the year much as the same way they left 2020, with risk appetite remaining firm. 

One interesting observation as we kick off 2021 is that so many investor and analysts’ views are aligned in the same direction (long Emerging markets, short USD, long value stocks, etc), and positioning is already looking stretched in various asset classes as a result.  While I would caution against catching a falling knife there is a clearly a risk of jumping on the same bandwagon as everybody else in a market that is increasingly positioned in one direction.  Overall, while the risk rally is likely to continue to have legs in the months ahead, investors should be on their toes in the weeks ahead given risks of a positioning squeeze in various asset classes.

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