QE2 | BetaShares

QE2

BY David Bassanese | 8 February 2021
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Global Markets

Those of us counting on a deeper correction in equities to add exposure would have been a little disappointed last week as the “retail rebellion” volatility fizzled out and markets instead basked in the glow of ongoing good economic data, corporate earnings, and major ongoing macroeconomic stimulus. The S&P 500 Index surged back 4.6% to a new record high. U.S. bond yields also pushed higher and even the $US is showing signs of strength. Oil surged while gold fell back further.

In the U.S., all the major tech stocks that reported Q4 earnings last week (Alphabet, Amazon, Apple and Facebook) easily beat market expectations, with the reporting season overall again proving better than hoped.  U.S. manufacturing indices suggest a strong recovery is underway, and while monthly payrolls again disappointed for the second month in a row – it’s seen as “old news” reflecting a year-end tightening in COVID-19 restrictions due to the recent surge in cases, which have since eased back.  Indeed, after rising for several weeks to 927k up until early January, U.S. weekly jobless claims have since eased back, dropping to a (still high) 779k last week.

Meanwhile, U.S. President Biden seems intent on ramming through his US$1.9 trillion stimulus package without any Republican support if need be – legislative manoeuvres last week now mean only a simple Senate majority will be required to pass it. While the package could be trimmed at the margin, it’s still likely to represent an economic boost when implemented (especially the $1400 cheques mailed to almost every household).  Even better news for markets is the fact that the package might not finally be passed until mid-March, meaning it could be an ongoing positive discussion point for some time (the gift that keeps on giving!).

Of course, some risks remain. We heard last week that the South African COVID-19 strain is proving resilient to at least one of the major vaccines currently available – and there’s always the risk of more strains emerging.  Bond yields have also crept up recently and could rise further (pressuring equity valuations) if current global supply bottlenecks lead to a quicker uptick in inflation.  Of course, while I believe inflation will remain generally low and non-threatening for some time, a short-run uptick is possible if some businesses respond to the strong bounce back in demand and any temporary shortages by attempting to lift prices.

In terms of the week ahead, the U.S. Q4 earnings season rolls on, with reports due from General Motors, Twitter, Disney and Coca-Cola among the notable mentions.  The U.S. CPI report on Wednesday will also attract more than usual interest, given simmering fear (as noted above) of an uptick in inflation.

Global Equity Trends

In terms of global equity trends, the recent outperformance of Japan and Emerging Markets has yielded a little to the U.S. and Europe in recent weeks, while Australia continues to generally underperform (despite strong outright performance). The growth versus value tussle last week ended in a draw.  Value is holding up but it has not been clearly outperforming growth since early December.

Australian Market

The local highlight last week was the RBA again trying to unveil “shock and awe” with an earlier than generally expected extension of its bond buying program.  Despite the much stronger than expected rebound in the economy in recent months, the RBA saw fit to announce another $100 billion in government bonds would be progressively bought when the current buying program ends in mid-April. What’s more, the RBA reiterated it currently does not see a case to raise the official cash rate “until 2024 at the earliest” because it will likely take that much time before the labour market tightens by enough to create a decent uplift in wage growth.

Meanwhile, local data only confirmed the economy’s solid recovery, with ANZ Job Ads rising a further 2.3% in January and home building approvals rising a lazy further 10% in December.  Despite the sharp drop in immigration, strongly rising house prices are encouraging more stand-alone houses to be built where land is available, and even high-rise building is on the rebound – presumably in anticipation of higher immigration, tourism and foreign students later.

As evident in the charts below, a drop back in iron-ore prices in recent weeks has taken the steam out of the $A’s ascent and the recent trend of resource sector outperformance. Financials and technology continue to do well. Note also that despite the RBA’s new bazooka, local 10-year bond yields continued to creep higher – pushed along by rising U.S. yields.

This week we should get further good economic news when the NAB and Westpac measures of business and consumer sentiment are released on Tuesday and Wednesday respectively.  We’re also starting our own six-monthly earnings reporting season, with results likely to be generally upbeat (given high commodity prices, strong retail spending and an improving housing sector). Of notable interest will be the result of bellwhether stock CBA, and the extent to which it further restores dividend payments after cuts through last year.

Have a great Week!

 

3 Comments

  1. Don Pridmore  |  February 8, 2021

    Hi David,

    Any chance of reintroducing the expand graphs functionality which was very helpful.

    I find your commentary insightful thanks.

    Don

    1. BetaShares Client Services  |  February 17, 2021

      Hi Don,

      Thanks for the feedback. We will add this function back in for future blogs.

      Sincerely,
      BetaShares Client Services

  2. Ted Kramer  |  February 9, 2021

    David,

    Thank you. QE2 is a great headline and you answered all my questions relating to current high valuations. Will join the webinar.

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