Weekend Thoughts - Bring On The Next Narrative

Monday's vaccine news sent shockwaves through the markets.

This was the moment.

The news everyone had been waiting for. Instant euphoria.

Guys, Look. Russell 2k futures are limit up.

You what? Limit UP?

YES. This is IT! The great rotation has arrived.

Is it finally time for the laggards to shine?

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The charts are inconclusive.

After the impulse move, we've seen consolidation around the 2018 high.

Purely on a technical basis, it looks like a failed breakout.

Some would argue that this is merely a pre-breakout consolidation.

Has anything actually changed?

Yes, the vaccine is coming, and just like your average Amazon delivery, it looks to be bang on schedule.

The cold storage problems look surmountable too.

So, what next?

Where's the next narrative?

How about that reflationary fiscal policy?

Ah.

Maybe the stimulus deal?

Trump wants one, but he's even more irrelevant now than he was in the previous round of negotiations.

 Congress must now do a Covid Relief Bill. Needs Democrats support. Make it big and focused. Get it done!— Donald J. Trump (@realDonaldTrump) November 14, 2020 

The deal is back at square one (and unlikely to be resolved any sooner than January);

Pelosi and Senate Democratic leader Chuck Schumer Thursday reiterated that their $2.4 trillion proposal needs to be the starting point for talks. McConnell has advocated for about $500 billion, a top-line number well below the Trump administration’s roughly $1.9 trillion negotiating position before Election Day.

Observers see little likelihood of a deal before President-elect Joe Biden takes office, and with the control of the Senate next year still in question. Democrats have a shot at retaking the upper chamber if they win two runoff races in Georgia on Jan. 5.

“Something in the neighborhood of $1 trillion late in the first quarter is a reasonable expectation” for fiscal stimulus, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note this week.

Morgan Stanley strategists are similarly penciling in a package of that scale in early 2021.

In any case, isn't this stimulus well and truly priced in?

Yes, we all know markets are forward looking, so perhaps the question is just how far they're prepared to look ahead...

Our illustrious leaders tell us that we face a "dark winter" (Joe Biden), a "river of uncertainty" (Christine Lagarde) and "we're not going back to the same economy" (Jerome Powell) in any case.

What exactly are markets supposed to price in then?

Moncef Slaoui, (co-lead of Operation Warp Speed) says 20 million Americans could receive a Covid-19 vaccine in December, increasing to about 25-30 million people each month afterward.

New vaccines will be approved over time, and the mass vaccinations can begin.

In other words, there's light at the end of the tunnel and we are on the road back towards (a new) normal.

We can leave the dark winter behind us, and look forward to a summer of joy and enlightenment.

Consumers will spend freely, tsunamis of liquidity will do more than just trickle down to the real economy...

They'll crash into our economic shores, drenching us in affluence and we'll finally hit those mythical 2% inflation goals.

As Keynes himself famously commented;

Bollocks!

We're only in mid-November.

Case numbers are surging (and hitting record levels in many countries), hospitalisations are increasing and all roads lead back to Covid.

Movement restrictions are already being imposed (albeit less stringently than before), and policymakers are struggling to balance health and economic risks with their all important popularity.

In Europe, economic activity levels are already falling.

Bloomberg

New restrictions have been announced in Austria;

 The Austrian government has introduced a second lockdown as in spring starting on Tuesday until December 6. The curfew restrictions from Nov 3 will apply during the day. A ban on trade except for essentials (grocery, pharmacies, drugstores & tobacco shops). Distance learning.— Velina Tchakarova (@vtchakarova) November 14, 2020 

In Germany...

“We cannot afford a yo-yo shutdown with the economy constantly opening and closing.”

“My forecast is that we will have to talk about further restrictions rather than any easing”, he told daily Augsburger Allgemeine.

Other countries will surely follow as winter bites and everybody spends more time indoors.

Policymakers are spinning plates to the best of their limited abilities.  

If we can just keep the schools and essential businesses open, the non-essential businesses closed, have people work from ho... Ah s**t.

'tis my humble opinion that markets remain far too optimistic about the economy in the near-term.

That said, it is also entirely understandable.

I mean, what else can they do?

Capital needs a home, traders need their yield, and sitting around moping about the mess we're in won't put the food on the table.

Yes, it feels like everything will soon fall apart, the end is nigh, and at some point reality will bite, but which reality?

The reality where the economy and the stock market move in lockstep?

Or the reality where Lagarde's river of uncertainty is actually a river of liquidity flowing directly(ish) from the central banks into the markets?

There's no sign of that particular waterfall drying up, and the taps will likely be opened further still.

All of which leads me to think that the great rotation will be nothing like we saw on Monday.

It's like playing football manager with the cheat codes on.

First you buy all of the star strikers. You can figure out what to do with them later.

Then you realise your defence is terrible, yousold your goalkeeper by accident and it's time to add some depth to your squad.

The rising tide will surely lift all boats, and it doesn't necessarily need to be at the expense of anything else.

A few things in the news caught my eye this weekend.

The German government’s council of economic advisers expects the economy to shrink less than initially feared this year thanks to a strong summer, but a second wave of the COVID-19 pandemic is clouding the growth outlook for 2021.

As part of the new round COVID-19 relief measure, companies can get up to 200,000 euros a month to cover fixed costs such as rent, while solo entrepreneurs can get up to 5,000 euros.

Asia Pacific nations including China, Japan and South Korea on Sunday signed the world’s largest regional free-trade agreement, encompassing nearly a third of the world’s population and gross domestic product.

Top officials from 15 nations that also include Australia, New Zealand and the 10 members of the Association of Southeast Asian Nations inked the Regional Comprehensive Economic Partnership, or RCEP -- nearly a decade in the making -- on the final day of the 37th Asean Summit hosted virtually by Vietnam.

Supporters of the trade pact, which covers 2.2 billion people with a combined GDP of $26.2 trillion, said it will bolster pandemic-weakened economies by reducing tariffs, strengthening supply chains with common rules of origin, and codifying new e-commerce rules.

Tariffs will likely be eliminated on 86% of industrial goods exported from Japan to China as a part of the Regional Comprehensive Economic Partnership to be signed on Sunday, Nikkei has learned, benefiting Japanese exporters such as auto parts suppliers.

The tariff elimination rate will significantly increase from the current 8% between Japan and China, countries without a bilateral free trade agreement.

The wide range of tariff cuts are a result of China's compromise. Faced with an opportunity to lead a regional trade pact in which the U.S. and India are not part of, Beijing was eager to put pen to paper, even if it meant inflicting pain on domestic industries.

Some tariffs will be abolished immediately while others will be eliminated gradually. For Japan, almost 90% of auto parts shipped to China will become tariff-free. Tariffs on gasoline engine parts as well as some steel products will be dropped when the agreement takes effect.

As for Japan's exports to South Korea, 92% of goods will be waived from duties, up from the current 19%. About 80% of automotive goods, including air bags and electronic parts, will enjoy a gradual lifting of tariffs.

The sale of new petrol and diesel cars will be banned within a decade, Boris Johnson is set to announce this week as part of a broader package of green initiatives.

In February the prime minister said he was bringing forward a ban on the sale of new petrol and diesel cars from 2040 to 2035. Now Mr Johnson is expected to move the date to 2030 in an attempt to jump-start the market for electric cars in the UK and propel the country towards its goal of net zero emissions by 2050, according to government and industry insiders.

However, ministers are expected to keep the less stringent date of 2035 for an end to the sale of hybrid cars that are powered by electric batteries as well as traditional motors.

Mr Johnson is preparing to make a speech this week setting out his vision for switching to a low-carbon economy.

It is expected to feature pledges on increased use of offshore wind for electricity generation, and technologies to capture and store carbon dioxide and deploy hydrogen as a power source.

Mr Johnson is also set to give the go-ahead to new nuclear power stations, notably at Sizewell in Suffolk, and provide funding for small modular reactors.

Brexit - there has been talk of a new 'deadline' of Monday the 23rd.

Negotiations continue with little sign of progress (publicly at least).

1. BREXIT ‘MOVE WEEK’: After the fireworks at No. 10, attention shifts to Brussels at the start of a critical week (yep, one of those) for the Brexit talks.

Irish Foreign Minister Simon Coveney told Sky’s Sophy Ridge this is “move week … We’ve got to make big progress.”

The “big issues” need to be “resolved in principle this week so that then we can finalise text and get this deal ratified,” he added.

U.K. Environment Secretary George Eustice agreed, saying that the week needed to deliver the “headlines of an agreement,” while adding that “you can always squeeze out extra time if you need to if you’re nearly there.” Reminder: there are 46 days to go until the end of the transition period.

This 'deadline' for a deal will surely be breached, but signs of significant breakthroughs are worth watching for.

 #Brexit timetable. Talks resume in Brussels on Monday but I don’t foresee a deal until mid to late December. I expect more dates will be added to this schedule as talks intensity into the end of transition pic.twitter.com/H9KgbUc6IG— Anthony Cheung (@AWMCheung) November 15, 2020 

We start the week with China's Retail Sales and Industrial Production data (October).

Retail sales are the main one to watch, with expectations of 4.9 to 5% growth. As the period also includes October's Golden Week, a sizeable miss would be hugely disappointing.