Macro Themes To Consider for the Rest of the Year
The Presidential election in the United States was closely watched by traders and investors from all over the world. The geopolitical and economic implications of a new White House administration are so huge that the macroeconomic landscape changes dramatically.
Immediately after being installed as the new President, Biden and his team vowed to restore most of Trump’s controversial macro-decisions (e.g., withdrawal from the World Health Organization). Suddenly, institutions like NATO revive under the new administration. Everything changes as America changes leadership.
With less than two months ahead of the end of the year and a pandemic underway, what are the macro themes to consider?
Big tech companies already rallied in response to a Democrat leadership. This comes as a surprise if we consider the corporate tax raise to follow, but the rally is viewed as a response to reduced regulatory threats under the new administration. As such, expect the Nasdaq 100 index to outperform its peers as the big tech companies will have an easier time generating free cash flow.
Emerging markets equities did not follow the rally seen in the developed world after the March dip. However, if we are to pick some markets likely to outperform, then these will be North Asia as they better handle the coronavirus pandemic so far (e.g., China, Taiwan, South Korea).
Renewed lockdowns in Europe caused the yields to spread, but the game-changer should be the ECB decision in December. It is widely expected that the ECB will deliver further easing, but it is unclear how it will do so. If it decides to include “fallen angels” (i.e., junk debt), such a move should boost the Euro high yield market. In the meantime, Greece’s two-year yield turned negative today, perfectly illustrating the power of monetary policy in the 21st century.
The general consensus is that further stimulus from the Fed and the large fiscal one to come will send the USD lower. However, this is a trade worth thinking twice before acting because of the exogenous risk posed by the pandemic. Renewed lockdowns in Europe and the United Kingdom may weigh on their currencies, favoring a higher dollar. Moreover, if the virus further spreads in the United States, investors may turn to the world’s reserve currency again.