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Eye on the Market

Explore timely commentary on the economy, markets, and investment portfolios by Michael Cembalest.

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LIQUIDITY INSIGHTS EYE ON THE MARKET MARKET UPDATES

LIQUIDITY INSIGHTS

A “close call” on the BOE’s laboured path to higher rates

The Bank of England (BoE) defied market expectations for a rate hike as they left the Bank Rate unchanged at 0.1% and maintained total target of asset purchases at GBP 895 billion. The deferred hike means no immediate respite to ultra-low sterling yields, although further interest rate volatility is likely; investors should consider maintaining a disciplined approach to cash investment and segmentation.

RBA Tentative Tapering

The RBA announced its first tentative step towards tapering and eventual policy normalization.

ECB opts for a “steady hand” on policy

At its monthly policy meeting in June, the ECB revised its growth and inflation forecasts upwards, but confirmed its “very accommodative monetary policy stance”.

Bank of England upgrades economic forecasts – but let’s not get carried away!

At the latest Bank of England (BoE) monetary policy meeting, the Monetary Policy Committee (MPC) significantly upgraded its economic growth, inflation and employment forecasts.

Monetary Authority of Singapore – Cautious optimism as recovery continues

At their latest semi-annual policy meeting, the MAS' comments was modestly upbeat and the central bank revised up their headline inflation target - both of which could have implications for SGD cash investments.

European Central Bank: Turning words into actions

The European Central Bank (ECB) Governing council (GC) decided to “significantly increase” monthly Pandemic Emergency Purchase Program (PEPP) purchases over the second quarter of 2021, based on the recent evolution of financing conditions and inflation outlook.

Bank of England put negative rates on the long finger

The Bank of England (BoE) has postponed a decision on negative interest rates for at least six months with the probability of negative rates declining sharply due to the expectation of a strong vaccine-led recovery.

Chinese taper tantrum

The surprise withdrawal of liquidity by the People’s Bank of China in the last week of January triggered a spike in short-term interest rates. Aidan Shevlin, International Head of Liquidity Fund Management, shared his perspectives on China’s monetary policy.

China’s onshore corporate bond market – understanding recent market volatility

China’s bond market has seen an unusual wave of defaults over the past month – triggering a jump in credit spreads and raising investor concerns. Find out the implications to cash investments and why independent credit research remains important.

Implications of COVID-19 outbreak for short term interest rates

The recent coronavirus (2019-nCoV) outbreak in China has increased investors’ trepidation and financial market uncertainty.

EYE ON THE MARKET

The Thing

Some things just cannot be talked about. So in this year’s Thanksgiving piece, I wrote about something else.

Help Wanted

In this Eye on the Market: early signs of goods bottlenecks easing; the more persistent issue of US labor shortages; the US, Taiwan, China, treaty changes and semiconductor capacity; and an update on the most over-indebted US states

Dude, Where’s My Stuff?

The global supply chain mess will require increased vaccination and acquired immunity, semiconductor capacity expansion and the end of extraordinary housing/labor supports to resolve. A close look at some very anomalous charts on shipping, semiconductors, inventories, labor shortages, foreclosures and mortality.

Your Fall 2021 syllabus

Greetings students. We look forward to seeing you back on campus. Your Fall 2021 syllabus is attached. Syllabus update: Biology BI66 “The Origins of COVID” has been cancelled until further notice.

Spaccine hesitancy

Topics: if people avoided SPACs instead of avoiding COVID vaccines, the US would be both wealthier and closer to herd immunity. An update on our SPAC analysis from last February, and a look at the strange mathematical paradox that ends up understating some critical COVID vaccine efficacy data.

Red Med Redemption

Red Med Redemption: A visual depiction of politics, ideology, vaccine resistance and the Delta variant. Other topics: US economic recovery update, and big tech reliance on acquisitions to fuel growth at a time of rising anti-trust enforcement. We conclude with a new “Investor Odds & Ends” section that covers NYC hotel/office markets and possible changes in personal, corporate and international tax rates.

Thy Brother’s Keeper

COVID and the Delta variant; the Fed as firefighter and arsonist; US-China economic divorce picks up steam; and the pig-snake inflation timetable (how long until we know if there’s a permanent wage/price rise).

Food Fight: 2021 private equity update

Every two years, we take a close look at the performance of the private equity industry given its rising share of institutional and individual portfolios. Our findings this year: the private equity industry is still outperforming public equity, but this outperformance narrowed as all markets benefit from non-stop monetary and fiscal stimulus, and as private equity acquisition multiples rise. We examine manager dispersion, benchmarks, co-investing, GP-led secondary funds, the torrid pace of industry fundraising and manager fees in this year’s piece.

An investor’s look at China’s recovery

An investor’s look at China’s recovery, the Sinopharm vaccine and the importance of scientific methods

Inflation. Duh!

Our February and March Eye on the Market pieces discussed shrinking US excess capacity, fiscal stimulus and the contortions people gyrate into to convince themselves that rising inflation would not be a problem for equity markets. My conclusion at the time: expectations for permanently low inflation and rates drove the rise in P/E multiples in recent years, so a reversal in inflation and rate expectations poses a risk to them. Since March, US equity markets hit a plateau as inflation expectations reached their highest levels in a decade. This Eye on the Market addresses questions we’re receiving on markets, inflation, rates and capital gains taxes, and concludes with comments on COVID and India.

Eye on the Market 11th Annual Energy Paper

Even as the world becomes more energy efficient each year, overall levels of CO2 emissions continue to rise. Without decarbonization shock treatment, humans will be wedded to fossil fuels for longer than they would like.

Absolute Value

Topics: Biden goes for broke on growth, driving coincident and leading indicators to all-time highs; the Value recovery and where it goes from here; COVID herd immunity, the path to normalcy and rising concerns about thrombosis risks from vector vaccines.

The Smalligarchy

The Smalligarchy: how the narrowest political margins in decades could deliver one of the biggest taxation and spending increases in the post-war era; a discussion of the investment implications of physical and human infrastructure bills; the US economy approaches lift off; and the latest news on Morone saxatilis.

Interest rate pretzels and the Zoom shock on real estate

If long-term US interest rates stay below 2%, that’s a great sign for equity investors. But if they don’t…it’s amazing to see the pretzels that people contort into to convince themselves that rising rates are not a problem for equities. Also: an early look at the Zoom shock on commercial and residential real estate, and the diverging COVID trends in the US vs Europe.

Very short stories

Short stories on the global recovery, plummeting COVID infections, Larry Summers & the bond market, SPAC sponsors, renewable energy, the Texas power outage and the battle for the Republican Party.

Hydraulic Spacking

The SPAC capital raising boom, and why Biden’s early stage energy policies are more likely to increase oil imports rather than reduce emissions.

Fear of Flying

Equity markets are flying. So is COVID. So are corporate reactions to Congressional objectors.

Eye on the Market Outlook 2021: The Hazmat Recovery

Michael Cembalest’s views on what will drive markets and the economy in 2021, as well as the challenges we face that stimulus and vaccines can’t solve.

Special EOTM: Jan 6 Joint Session of Congress

The Jan 6 Joint Session of Congress is shaping up to be a very contentious meeting. Here’s a brief 2-page primer on the rules of engagement, for those interested.

Holiday Eye on the Market: The Winter of Our Discontent

The belief in election illegitimacy is spreading faster than COVID. With field reporting from Alexander Fleming, Rutherford B Hayes, Richard III, Bob Newhart and the Attorney General of Ohio.

Election 2020 - Praying for Time

The election as referendum on America: how well does the “system” work, and for whom?

The Needle and the Damage Done

The cost of engineering a US recovery as the world waits for a vaccine; Biden agenda on taxes/spending; Tech stocks (2020 vs 1999); COVID and The Fountainhead; US election rules, dates and process in light of derogatory comments on mail-in voting by the President and Attorney General

The Bounce

The US recovery; The flood of money and market returns; Globalization lives; Reducing COVID mortality through vascular treatments; Realistic timetables for never-been-done before vaccines; Sweden’s COVID experiment is not what you think

The Day After

Tracking the rebirth of the US consumer with real time data as a function of infection levels and state policy. Additional topics: no evidence yet of material second waves of COVID infection, and a round-up of the latest news on vaccine trials (Moderna, Oxford, Sinovac) and anticoagulants.

Zoom Room

In this week’s Eye on the Market, we review topics from our recent client Zoom calls. Topics include: risk of inflation, second waves of infection, the effectiveness of lockdowns and Biden’s taxation and spending agenda.

Ready or Not: The US prepares to reopen

An update on the COVID-19 crisis as the US prepares to reopen despite having one of the highest infection rates in the world. Additional topics: monoclonal antibodies and anti-viral trials; the growing gap between markets and the economy; S&P 500 earnings haves and have-nots; regional equity performance (Europe loses again) and leveraged loans at a time of rising bankruptcies.

State's Rights

In this week’s note, we discuss the latest news on US infection trends and reopening plans, Remdesivir trial results and whether US fiscal stimulus is “enough”.

Are we there yet?

Lockdown relaxation and economic reawakening…are we there yet?

COVID and culture

In this week's note, we take a close look at country and regional virus data, and examine the pitfalls of over-extrapolating trends that often reverse.

The equity rally and herd immunity

After the equity rally, P/E multiples are back at around 16x 2021 consensus earnings.

Man vs Nature Part II

Virus trends and head-fakes, convalescent plasma and U.S. vs. China lockdowns.

Man vs Nature: what the government can and cannot fix

There are things the government can try and fix during a pandemic and other things which it can't.

John Stuart Mill and the road from ruin to recovery

There are some difficult days ahead as quarantines and lockdowns grow. I want to share something with you from John Stuart Mill as we head into the unknown.

Coronavirus (COVID-19) research compilation

Michael Cembalest, Chairman of Market and Investment Strategy, has compiled his extensive research on coronavirus.

The pandemic gap

A lot of data is being made available on the coronavirus, but most of it requires careful analysis before drawing conclusions.

Berning Man

Confounding almost every forecast we saw last week, Senator Biden appears to have emerged from Super Tuesday with a sizeable delegate lead. Why might the night have turned out so differently from what was expected just a few days ago?

COVID-19 update

A Coronavirus update: severity, consequences and implications for investors.

Millions and Trillions

Answers to questions on the coronavirus, US megacap stocks, the cost of Democratic Healthcare plans, the Iowa caucus and the problem with the student loan system.

Rotten Tomatoes

Consensus reactions to the Phase I US-China deal are very skeptical, but may be missing the broader point. A brief note on what happened, and the alternatives.

Ghosts of Christmas Past

After a very positive year for investors in 2019, we expect lower positive returns on financial assets in 2020 as some Ghosts of Christmas Past reappear.

War of the Worlds

How a discussion about China and Hong Kong morphed into a chart war about Trump, Hoover, Taft, Rachel Maddow and Anderson Cooper.

The Armageddonists

While recessions and bear markets are a fact of life, something peculiar happened after the Global Financial Crisis: the rise of the Armageddonists.

Warren Peace

A close look at the Progressive Agenda, China’s deteriorating welcome mat in DC and US Tech IPOs.

Active Management and QE-distorted markets

Michael Cembalest analyzes the performance of over 6,700 domestic and international active equity managers and discusses the challenges they face.

Cold Turkey

A brief comment on a proposal from leading Presidential candidates to ban hydraulic fracturing everywhere, immediately.

So long Yellow Brick Road

It was a long, hot summer at the Heritage Foundation. An update from the front lines of the Trade War.

Lost in Space: The Search for Democratic Socialism in the Real World

Michael went on a search for Democratic Socialism in the real world, and ended up halfway around the globe from where he began.

Listen when people tell you who they are

Michael discusses how he should have taken Trump at his word on tariffs, and the impact of the widening trade war on global growth and equity markets as proposed tariffs approach pre-war levels.

Smoot Hardly

The US-China trade war, prescription drug price legislation and the 2020 election.

Energy Outlook 2019: Mountains and Molehills

Topics: unattainable objectives of the Green New Deal; overview of the world’s decarbonization challenges; Germany’s energy transition; Trump’s War on Science.

MARKET UPDATES

COP26: Not a failure, not a success

COP26 saw significant announcements in areas such as coal, methane and deforestation, yet progress fell short of the scale required to give us confidence that disruptive climate outcomes can be avoided. Physical climate risks warrant careful consideration for long-term investors.

UK equities offer value

With UK shares looking cheap, long-term investors may be able to pick up a bargain in the UK stock market this year. Explore our outlook for UK equities.

How to navigate the three challenges in China?

This paper, written by Tai Hui and Hugh Gimber, discusses the major challenges faced by China equity and fixed income market, and their investment implications.

Monetary and fiscal coordination and the inflation risks

With the recovery supported by loose monetary and fiscal policy, Global Market Strategist Jai Malhi asks whether the balance of risk has shifted towards higher inflation.

Investment implications of recent Chinese policy interventions

Hugh Gimber, Global Market Strategist, and Tai Hui, Chief Market Strategist, Asia Pacific, explore the investment implications of recent Chinese policy interventions.

What should investors do after China’s increase in regulations?

Investing in China the right way is key: with a portfolio of companies, listed both offshore and onshore, with a manager that has a local presence and can do long-term fundamental analysis.

Four reasons why investors should not underestimate the European Union’s pandemic recovery fund

Explore how the fiscal stimulus provided by the EU's pandemic recovery fund could lead to stronger economic growth and boost demand for European assets.

Value is back, but growth is not out

Will this year’s value rally continue, or are growth stocks set to regain the initiative? In our latest On the Minds of Investors article, Global Market Strategist Tilmann Galler examines the basic drivers of value outperformance, and looks at how value stocks may perform in three near-term economic scenarios based on our latest projections.

The implications of carbon pricing initiatives for investors

Could carbon prices be about to rise? Global market strategist Vincent Juvyns looks at the increasing regulatory pressures on carbon pricing, and assesses the potential impact on markets

It’s getting hot in here: Growth and inflation are heating up

With Covid cases falling, excess household savings and US fiscal stimulus should provide the fuel for a stellar second half of 2021 for developed economies. But roaring growth could also bring risks.

Achieving net zero: The path to a carbon-neutral world

Governments are aligning behind the goal of achieving net zero emissions by 2050, but dramatic changes to the global economy will be required to get us there. Learn more about the policies and innovations that could pave the way to a carbon-neutral world.

Asia's decade: Getting ahead of the growth opportunity

Rapidly rising incomes in vast populations are set to make Asia the largest contributor to global growth in the 2020s. For investors, the opportunity looks too big to ignore.

The impact of ESG factors on portfolio returns

History provides only a limited guide to the implications of ESG factors for returns. We look at the conclusions that can be drawn from the past, and how investors can prepare for the future.

The case for ESG integration when investing in EM

Explore the strategies that can help investors maintain income and diversification in a post-Covid world of low interest rates and negative government bond yields.

Why and how to re-think the 60:40 portfolio

The challenge of low government bond yields means investors must rethink the 60:40 stock:bond allocation. Discover where they can turn for diversification.

What does Biden's presidency mean for the global climate agenda?

Joe Biden’s presidency is expected to bring increased momentum on tackling climate change. Carbon intensity is likely to become an increasingly important metric in investment decisions.

When will the vaccines allow for a sustained economic recovery?

Successful vaccine rollout should drive an economic rebound as pent-up spending is unleashed. We assess the timings and market implications.

What are the implications of the Brexit deal for the economy and markets?

It is hard to remember a time when Brexit was not dominating British headlines, but at the midnight hour, UK and EU negotiators finally reached agreement on a new trade deal.

Monitoring the global impact of COVID-19

The spread of the coronavirus and its impact on global economic activity has materially changed the investment outlook for 2020. In this piece we provide a framework for tracking infection rates globally and monitoring the impact on economic activity.

The European Central Bank aims to ‘thread the needle’

The leader of the European Central Bank (ECB) has become very familiar with the challenge of ‘threading the needle’ in recent years and the test facing Christine Lagarde today was no different.

The Great Glut: A historic supply and demand shock in the oil market

Rising production and collapsing demand due to the COVID-19 pandemic is causing an unprecedented glut in the oil market. As a result, we are currently witnessing a pronounced supply and demand shock that has sent oil prices to a multi-year low.

The ECB unveils targeted measures and passes the baton

The ECB announced measures to cushion the COVID-19 financial shock, but stopped short of cutting rates. All eyes are now on governments for a fiscal response.

UK monetary and fiscal stimulus – Unprecedented shock, unprecedented response

The UK’s coordinated monetary and fiscal response to the COVID-19 outbreak is unprecedented.

What does the latest oil price collapse mean for investors?

It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.

Changing of Lagarde, but toolkit challenges remain

The European Central Bank (ECB) made no changes to its key interest rates, asset purchases and forward guidance and is unlikely to make any changes in the coming months.

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