November risk sentiment continues to sustain major stock markets near record highs driven by a reprieve in US-China trade negativity, UK election optimism, and the persistence of low or negative interest rates. S&P 500, the main US index, rallied 2.9% over the first four weeks of the month while locally the ASX 200 was also up 2.5%.
However, as bullish as markets have been pricing in best case outcomes across ongoing macro themes, our clients recognise that value opportunities exist across the board. Some clients are taking advantage of contrarian risk/reward bets hedging against growth headwinds in the scenario that we might see a hard and not soft-landing narrative.
The presence of US-China trade policy uncertainty remains a leading driver of volatility within broad FX and equity markets. The recent lull in negative US-China trade headlines, therefore, has driven equity volatility to year lows as captured by the widely known VIX volatility index. While negotiations appear to be on better footing for the time being as both nations look to get something done, it’s difficult to say whether a “phase 1 deal” will be meaningful in terms of timing and substance. Hence, controlling the narrative will be important to Trump as campaigns get underway for the 2020 US Presidential Election. Our clients expect positive trade rhetoric to persist but remain cognisant that upside gains are likely to be capped by their fleeting nature. Sentiment among our clients has seen USDJPY short positions proving popular throughout the month.
In the UK, the positive outlook around the Dec. 12 election, where Conservatives are expected to maintain a parliamentary majority, is keeping GBPUSD supported and some short distance below the significant 1.3 level. This base case has seen our clients take medium-term bullish positions on Sterling, looking to buy GBP dips. Given things have also been quiet on the BoE monetary policy front and party campaigns are still to run, we see UK election risks being the main driver of clientele positioning within Sterling over the next few weeks.
Furthermore, low and negative-yielding interest rates in approximately 30% of global fixed income has driven more capital towards equity markets due to higher expected returns. However, while this has been true of 2019, we’ve started to see some agitation from equity markets approaching all-time highs as G10 central banks take a momentary pause from their respective easing cycles. Implied pricing suggests there’s a low probability major central banks cut again this year, with most of next year still largely undecided. Our clients have started favouring stronger balance sheet, non-cyclical and positive operating cash flow stocks noting risks to the RBA’s outlook and a potentially stronger lean on fiscal stimulus to lift the Aussie economy.
Interestingly, the chart below suggests the ASX 200’s appreciation has been driven by higher valuation multiples, rather than better corporate earnings.