Global stock markets melt up around the corner

Abraham George Macro View

It is not only that we are in a low rate environment but in an extreme of all low rate environments. What does that mean for stocks? It forces people ‘out on the risk curve’, meaning forcing people to take additional risk in pursuit of higher returns. This has been our biggest argument for a weaker bond market.

Investors really have no juice left in the bond markets. Historically when the 10 year yield is below 3% stocks tend to trade at a P/E higher than 20. So, a forward P/E of 22 could be still cheap in this rate situation, especially with the Fed’s aggressive QE program.

Corporate America always takes advantage of putting all the bad news on the table in a widespread crisis. It’s safe to say that any loss or write down they could take, they took it last year. It also sets up big growth in year on year earnings for 2021. If that is the situation in US, I think bigger opportunities await in Europe and other emerging markets.

Europe has largely lagged the recovery in US and Asian markets. US markets are now 16% higher than the pre- pandemic highs. Germany the best in Europe only rose to pre- pandemic levels in the DAX last month. France is still underwater and about 7% lower than pre- pandemic highs. Spain and Italy are even much worse. But there may be hope. A new government is being formed in Italy. It is likely to be led by one of the key players in the GFC recovery and a familiar name to all of us - Mario Draghi (former ECB Chief ). If Italy can set a trend, the rest of Europe is ready to follow considering the technical back drop.

A bull case exists in China as well. We have already discussed that the biggest winner in the US elections was China.

They are excited about going back to business, taking control of the global supply chain and manipulating the currency to ensure that they maintain good dominance in exporting. The Shanghai Composite is at the brink of breaking out above a new five year high. But I think the biggest opportunities are in India. We have discussed this in detail through many reports in the past.

Equities

The Dow, S&P and Nasdaq all gapped higher at the open. The Dow showed more strength than the S&P. Looks like a clear five structure completed in the S&P at 3915. A move below 3878 should open doors for a move down to 3825-3830.

Bonds

Bonds rallied to 167^25 . This competes a corrective rally for many lesser degree wave counts. Further up moves can take place but should not exceed above 168^05. If it does it may imply there are much bigger upside potential before it turns down again.

Euro

The latest price movements in Euro imply that the rally from 1.1952 may have more to go on the upside. After a brief pull back prices can rise above the Jan 06 high at 1.2350.

Gold

Prices carried to 1856 retracing. 0.786 of the decline from Jan 29 high to 1785. Chances are more that we see a bigger decline. A break below 1800 should elevate the chances more.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.