Hive Intelligence Report: Looking At A Biden-Vaccine World

The signal-to-noise ratio is now improving with US election fever dying down, so we are back with our Intel reports. The network zooms in market events from US politics – Senate, cabinet appointments and fiscal. On COVID – there are differing views around how to play the vaccine. Then there are views on Brexit and China.

Post US Elections:

• Republican control of state legislatures has allowed them to redistrict districts to their advantage during elections, both state and federal.
• Biden’s Covid bill will include direct stimulus payments, improved unemployment benefits; extra $200 to monthly social security; some student loan forgiveness; more money for small business; emergency sick leave; state fiscal relief, free Covid testing, treatment and vaccine.
• Senate effect on equities:
  • Narrative keeps changing whether Republican control would be bullish or bearish.
  • Democrat control could better for value stocks due to COVID recovery, but divided branches of government could also be positive.

Biden’s appointments:

• • Meet the contenders for Biden’s Cabinet
  • Tug of war between left and centrist wings of the Democratic party.
  • Fears of progressives gaining influence in Biden admin could hurt equities.
  • Gary Gensler, Obama-era official who clamped down on banks; He will lead Biden transition review of financial regulation.
  • Likely Republican control of Senate means each candidate will have to win a few GOP votes.
  • Candidates being discussed now:
    • Pentagon: Michele Flournoy
    • Treasury: Lael Brainard, Roger Ferguson (CEO, TIAA), Janet Yellen
    • State: Susan Rice
    • Commerce: Meg Whitman
    • Energy: Ernest Moniz
    • Labour: Julie Su
    • USTR: Jimmy Gomez
    • Fed: Janet Yellen, but Biden cannot fire Powell

Fed:

• December could see further action from the Fed.
• Risk that the Fed does nothing now, but defers to fiscal stimulus.
• Pat Toomey, likely to head Senate Banking Committee, calls for end of Fed pandemic emergency loans (set to expire this year but Fed and Treasury can extend).
• Mnuchin unlikely to renew 13(3) lending facilities, Fed unlikely to extend even if next Treasury Sec directs them to without bipartisan support.

COVID Vaccines and Cases:

• Equity: vaccine news bullish for SPX, tourism and hospitality, banks (lower credit losses).

• FX expressions: long GBP (positioning, large pre-order of vaccine); long tourism currencies like TRY, THB, MXN.
• Could be negative for HY if reduced Covid-19 risks help equities take off.
• But concern market has overreacted to vaccine given issues of safety checks, time to roll out, cold-storage requirements, virus mutation.
• Disconnect between USD and real rates currently: could start to support USD.
• New cases are rising in the US and some European countries, the threat of further lockdowns increases.

China:

• USDCNH likely reached its lows for the year already.
• China funding rate implies tightening coming.
• Ex-FinMin recently noted it is time to exit stimulus.

Brexit

• Departure of Lord Frost and Oliver Lewis (superficially) suggests that Boris Johnson could be about to make an offer to EU.
• Cummings departure suggests the government will take a softer approach on Brexit.

Market positioning:

• Shorts on USTs are stretched.
• CBOE daily put/call ratio at the low end of the range.
• Equity funds, especially the ones focused on the US, are performing in line, if not even outperforming, SPX returns YTD – suggesting positions remain elevated.
• Largest ever week of global equity inflows.

Alibaba:

• Upbeat on BABA: antitrust issue concerns platform access and fees – not central for profitability, which is strong; cheap relative to AMZN.
• Ant IPO (Alibaba has 33% stake in Ant): regulatory risks for both payment facilitation and micro-loans – two of Ant’s main businesses; valuation of IPO was too high.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Abbas Keshvani is a Macro Strategist based in Singapore. He previously worked in Macro Strategy roles at Barclays and Dymon Capital Asia. In addition to his contributions for Macro Hive, he maintains a personal blog here.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)