Chief Market Strategist at FXTM
Equity
markets have pushed higher in Asia following an impressive last hour rally on
Wall Street yesterday. The record daily increase in US COVID-19 infections and
the sharp rise in deaths has proved no barrier to the bulls. Rises in Apple and
Amazon stocks sent the Nasdaq Composite to a new record high of 10,492, while
the S&P 500 and Dow Jones Industrial Average advanced 0.78% and 0.68%
respectively.
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The
current environment has led to the closure of the $2.8 billion Lansdowne
Partners’ flagship equity long/short hedge fund. The lack of short winning
strategies may even force more hedge funds to follow Lansdowne’s footsteps. The
stimulus-driven market has made life for long/short strategies extremely
difficult as relying on traditional valuation metrics to find short
opportunities have failed throughout the latest bull market, and even
throughout much of the previous 12 years since the Great Financial Crisis.
Fundamentals
and valuations appear to be of limited influence on investor’s decision making.
The fear of missing out, or “FOMO”, monetary and fiscal policy actions, low
yields, lower interest rates for longer, are some of the factors that have led
to this structural change in markets. If the Fed can keep zombie companies
alive by keeping the lending taps open, why wouldn’t investors profit from
these actions? However, the Fed cannot keep running these measures forever, and
for many corporates relying on debt to stay afloat, sooner or later they will
fail if they can’t return to profitability.
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As
always there is the good and the bad news. Depending on where investors put
more weight is what drives asset prices and that is what leads to extreme highs
and lows. Looking at where US stocks stand at the moment, it seems lots of the
good news is already priced in. So even if bulls decide to keep pushing higher,
the upside is likely to be limited from current levels unless we learn that an
effective vaccine will hit the markets before year end and will be available
for most of the population. If investors truly believed that the economy was returning
to pre-pandemic levels soon, Gold wouldn’t be standing today at 9-year high, so
it’s evident that investors who are participating in this risk-on rally are
also hedging their positions by adding safe havens for their safety net.
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