ABE Weekly 22/07/2020

Market Update  

 

It’s starting to feel a little like groundhog-day unfortunately. Like Denis Denuto said in “The Castle”, it’s all about the Fed, it’s about COVID, well it’s just about the Fed, oh and maybe China. It seems the Fed has the whole world wrapped around its finger. If the Fed sneezes, we all catch a cold, perhaps not the best analogy now but it’s somewhat true. With US national debt sitting at approx. $25trillion, the printing presses must be almost running on empty and the can is so far down the road we can barely see it. So, what does all this mean?

We’ve said it before but worth reiterating, with rates effectively at zero pretty much around the world and the world looking in the face of an incredibly unpredictable future one can understand why people are throwing money at risk assets while at the same time sticking their head in the sand when it comes to fundamentals. The whole thing really feels more and more like a Ponzi scheme but who will be the last man standing. With no place else to park your money and despite crazy valuations not to mention the coin toss of what the world will look like post COVID it seems the only option is risk assets, aka equities. 

Bond yield curves suggest there is certainly little or no fear in the markets but as Warren Buffet said – “be fearful when people are greedy, and greedy when people are fearful” – question is where are we now?

We keep watching the long end of the yield curve to see if the 10year government bond moves up in yield to follow the party in the equity market.

In the meantime, our government is trying its best to soften the blow and getting Australia back to work and more details are getting released on a daily basis on the various programs and extension of the Jobseek and Jobkeeper programs. Further supporting these programs of course is the RBA which together with APRA are making sure our banking system remains strong.

European leaders are also working on a massive stimulus program with difficult negotiations in Brussels over the past days progressing. The over a 750 billion Euro “reconstruction” package has helped to boost investor confidence and the EUR/US$ moving up strongly to over $1.15.