The Big Squeeze | BetaShares

The Big Squeeze

BY David Bassanese | 1 February 2021

Global markets

It’s great to be back for another years of Bites! Since I last wrote on December 21, global equities have essentially moved sideways (consolidating after the big push higher in November), while bond yields have pushed modestly higher. The $US is trying to bottom out, while gold remains in retreat and oil prices are trying to push higher.

In terms of fundamentals, the global economy continues to recover despite COVID still raging in Europe and the United States. Indeed, the Q4 U.S. earnings reporting season is surprising to the upside and last week we learnt that the U.S. Markit service and manufacturing PMI indicators for January remained at levels indicating solid ongoing improvement. U.S. Q4 GDP rose by a solid 4% annualised, following a 33% post-lockdown surge in Q3. Inflation remains benign. The message from central banks is that policy will remain firmly accommodative.

The global highlight last week of course was a ‘revenge of the nerds’ retail investor squeeze on a few hedge fund favourite stock shorts, which on Thursday saw the S&P drop around 3% as both short and long positions were liquidated. Whether the retail vs. hedge fund fun and games continues will be a major focus globally this week, which could lead to further market volatility. Otherwise, markets will focus on the progress of Biden’s massive $US1.9 trillion stimulus package in the Senate. Following the total $US4 trillion in stimulus last year, many economists (myself included) feel the price tag on the latest package is excessive, and we may well see a smaller compromise package pass through Washington (albeit with support for lower income households hopefully preserved).

The U.S. earnings reporting season rolls on with Amazon and Alphabet (Google) unlikely to disappoint with their mid-week results. The week culminates with U.S. payrolls, which are expected to show a 50k bounce back in employment after a lockdowns-induced drop back of 140k in December. All up, fears of a double dip U.S. recession due to the lingering COVID problem so far remain unwarranted.

Global equity trends

In an innovation this year, I’ll aim to keep track of major themes taking place within global equities on a week-to-week basis. Chartwise, I’ve essentially boiled it down to a few themes below – country/regional trends focusing on the U.S., emerging markets and Australia, and the great ‘value vs. growth’ divide to summarise developments across sectors/factors.

As evident in the chart pack below, the U.S. market’s outperformance within developed markets has levelled out since around mid-2020 (with Japan a beneficiary), and emerging markets have started to outperform developed markets. Australian equities have at best kept pace with global equities on an unhedged basis, though have outperformed of late versus unhedged global equities due to strength in the $A (a rising $A reduces global equities returns in $A terms). The move higher in global equities late last year was associated with a rebound in values stocks versus growth, though growth has stage a modest fightback in the past few weeks.

Australian market

As with global markets, the S&P/ASX 200 has consolidated over recent weeks following the November breakout – with the 7,000 mark so far remaining elusive! Bond yields and the $A, however, have pushed higher – with the latter helped by a stunning further leg-up in iron-ore prices late last year.

Unless validated by either higher near-term inflation or a sudden RBA tightening bias (neither of which is likely) it’s hard to see bond yields pushing much higher. Similarly, with China looking to scale back its COVID related stimulus, iron-ore prices – which dropped last week – also seem likely to retreat further from their lofty heights, which should help limit further $A upside. That said, the local economy appears to be rebounding well, which could be an attraction to global investors and keep the $A stubbornly high.

In terms of equity trends, technology continues to defy the doubters and both financials and resources have also been holding up well. Resources, however, are vulnerable to a further decline in iron-ore prices.

Market-friendly news was evident again last week with another low CPI result and an encouraging further bounce in the NAB index of business conditions. This week, Tuesday’s RBA meeting is likely to be a non-event, though many in the market are still counting on the RBA boosting its bond buying program in coming months (though with the economy improving, the case for more stimulus has clearly weakened). Indeed, the RBA is likely to further upgrade its economic outlook when its latest Quarterly Statement on Monetary Policy is released on Friday.

Have a great week!


  1. Newbie question: For those of us starting out on our learning journey … is there a resource you recommend to help us understand those graphs, and the implications of the trends shown?
    Hint: Would love a newbie fundamentals webinar if you are looking for topics.
    Thanks in advance.

    1. David Bassanese  |  February 2, 2021

      Hi.. thanks for the feedback.. Sign up for our next quarterly economic webinar and I will explain in a lot more detail. Regards David

  2. Alan Turner  |  February 2, 2021

    Hello David,
    I appreciate the global sector graphs but I could not understand the S&P200 v ACWI graph (hedged and unhedged).
    Based on what you have written in previous months and proven by returns I thought hedged would be higher than unhedged over the last 6 months

    1. David Bassanese  |  February 2, 2021

      Thanks for the feedback. The chart is Australian versus global returns, with the latter in both hedged and unhedged currency terms. Due to the rising $A, unhedged (i.e $A) returns of global equities are less (the $A value of offshore returns is reduced) so Australian outperformance against unhedged equities is greater. Hope this clarifies..

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