The Latest On The Global Economy: Asia Rushes Ahead While Europe Plays COVID Defense But Markets Are Getting Nervous About An Eventual COVID Handoff To The US
The fragility of bipolar global economy is starting to factor into equity markets as the consolidation I expected started yesterday. While earnings estimates are rising so are economic risks from COVID, and this is likely to encourage the bears and keep the market in a trading range through the month. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. The mix of good and bad also implies the S&P 500 will be range-bound over the next few days.
The bipolar global economy has had the US and China at each end, but with China slowing more than expected due to Xi Jinping’s leftward tilt, the Asian contribution to economic growth is increasingly being shared among South Korea and Japan. SK is expected to raise rates and Japan will get a large stimulus, so East Asia is now balancing the US in maintaining global growth. The major positive is the exuberance of India, which remains one of the outliers among EM in generating robust growth.
Europe is the drag on the global economy with Germany at its core. While COVID is scaring German policymakers the good news is a new coalition is taking shape to lead Germany after Merkel leaves. While the coalition is left-wing it’s too fragile to do much and this is good news for investors and businesses. The risk of accelerating COVID is now the major concern since German business expectations continue to fall. So far the impact is being seen in the € but I see the equity markets starting to discount slowing global growth as the month closes due to fears of European COVID migrating here. This amounts to nothing more than consolidation around recent all-time highs. Come December I expect a full-blown correction to set in as geopolitical factors add to COVID fears and put the bulls on the back foot.
Yesterday I sold my position in Goldman Sachs (GS), and my current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), and a small net long position in S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).