High volume in Europe and US last Friday due to quadruple witching expiry (derivatives of stock index futures, stock index options, stock options, and single stock futures expiry), approximately as much as 200% vs 20 days moving average.
Fresh intraday all-time highs following on from the record highs that were set in the previous session for US indexes (Nasdaq record high). The US Treasury yield curve remained near its steepest in more than a year, underscoring how recession worries have receded, circa 30bps (again, it was inverted in the summer).
Some additional positive headlines on Phase 1 deal about to be signed have also helped. China has announced overnight that will lower import tariffs on some goods including frozen pork, avocado and orange juice from the 1st of January.
We should now expect the market to settle in a tight range until the end of the year (4 trading days left in Europe, 5 in US).
The latest data show an extreme greed at 92! It is exactly the opposite of 1 year ago when it was at 5 and we know what happened….
In UK, Boris Johnson’s Withdrawal Agreement Bill passed second reading, as widely expected (Tories promised to back it), with the House of Commons voting 358 in favor to 234 against. The UK is set to leave the EU on 31 January. In addition, Andrew Bailey was confirmed as the new governor of Bank of England (start on March 16).
As far as Macro is concerned, US Q3 GDP was unchanged to 2.1% annualized pace while, interestingly, consumer spending, which makes up two-thirds of the economy, increased up to 3.2% (from 2.9%) annualized pace in the same period, confirming the critical importance of personal consumption for the American growth.
Inflation expectations are very low within Developed Markets. Despite increased optimism towards global growth recovery, US consumers’ expectations of inflation over the next five years have reached a record low while 10-year breakeven expectations in US and Europe are close to 2016 lows.
EU & US average 5Y Breakeven inflation (dark) vs US Consumer expected inflation (light)
Value stocks would be the key beneficiary of any rise in inflation expectations.
Europe Value vs Growth (green) vs EU & US average 5Y Breakeven inflation (red)
In addition, a shift from monetary to fiscal expansion, should favor Value over Growth stocks. If Germany decides to implement a fiscal stimulus, European Value should have further to run in 2020. And considering that global monetary policy easing has been maxed out, there remains ample rooms for fiscal policy easing.
Monetary Policy Fiscal Policy
The chart below shows that monetary loosening has benefitted Growth which outperformed Value stocks by 40% during the bull market (red line MSCI World Growth vs Value).
The grey line shows the mix of global monetary and fiscal policy; If it’s below 100 means that fiscal becomes looser than monetary policy. Interestingly, it seems that both lines are correlated such that the looser global fiscal policy is, the higher the outperformance of Value vs Growth.