May 22, 2020
US equities mostly lower with the S&P 500 still on track for a +2.5% weekly gain. Bond proxies and defensive groups advance this morning, while cyclically-sensitive Energy, Financials, Industrials and Materials come for sale after 5 straight days of leadership. Treasury yields are lower with a second day of curve flattening. The dollar is firmer on the euro cross but little changed vs risk-sensitive yen. And Gold is only up +0.25% despite headlines around rising geopolitical tensions. WTI crude is down -3.5%, but off worst levels and still on pace for a weekly gain of ~11%. rack for a fourth straight week of big gains after prior rally. The Hang Seng fell -5.56% today after China confirmed reports it will impose new security laws in Hong Kong with associated increase in US-China tensions and expected HK protests. Mainland China and Japan benchmarks were also lower on the news, but there’s little evidence of ‘risk-off’ in cross market performance. The announcement comes out of today’s start of China’s NPC along with the country dropping its practice of setting an annual growth target. But Beijing did increase its 2020 fiscal deficit target to 3.6% vs the prior 2.8%, while reiterating its promise to implement the US ‘phase one’ trade agreement. Geopolitical headlines also focus on China omitting the word ‘peaceful’ in its stated intent to ‘reunify’ with Taiwan. The increased likelihood for a fifth US fiscal stimulus bill follows mostly encouraging comments from Mnuchin and McConnell. Overnight US earnings and guidance were mostly better than expected.
Ultimately: The massive liquidity boom continues to result in surging US and global money supply. US M2 (time deposits) has increased by $3T since March and this is only the beginning. When the uncertainty recedes, the money will need to go somewhere. Cash is yielding 0%, bonds are yielding less than 1% and equity PE multiples should continue rerating higher because the long-term nominal average return is in the high single digits.