Risk Rally Rolls On As Bull Case Remains Intact

WHERE WE STAND – As I staggered over a windswept London Bridge on my way to the office yesterday, becoming increasingly sodden with each step, I thought to myself ‘at least today can only get better’.

Although, in reality, when you meander into the office looking like you’ve just stepped off a North Sea fishing trawler that was caught in a force 9 gale, and get laughed at by the night watchman, the bar for things improving is a very low one!

I’m pleased to say that bar was cleared, though, with Monday proving to be another positive day for markets across the board, as last week’s risk rally rolled on.

Before getting to that though, a small rant. The pre-Budget rumour mill remains in full swing, with the latest such murmuring, via the FT, being that Chancellor Reeves is planning an ISA overhaul, which could include requiring stocks and shares ISAs to hold a minimum amount in UK equities.

Frankly, I view this is an utterly ridiculous idea. All astute observers agree that thinning liquidity and evaporating volumes in the London market need to be resolved. This, though, is not how you do it. You don’t fix the market by forcing participants to hold UK equities; instead, you fix it by improving the domestic economy, and by creating a growth-friendly environment for companies to operate in. Get that right, and capital will naturally flow. Quotas, of the ilk that seem to be being proposed here, solve nothing.

Anyway, onto cheerier matters, namely yesterday’s risk rally, as equities rallied across the board. I hate to go all ‘I told you so’ here but, well, I kinda did, as the market continues to shrug off that brief, and largely unfounded round of jitters over US regional banks from last week, and continues to re-focus on what remains a robust fundamental bull case. To remind, that case remains one of solid earnings growth, a resilient underlying US economy, and a looser monetary backdrop, to which we can soon add the re-opening of the corporate buyback window, plus bullish flows from FOMO/FOMU-driven participants as the year draws to an end. To my mind, the path of least resistance continues to lead to the upside, and dips remain buying opportunities.

Speaking of which, that path continues to lead higher for precious metals too, which gained broadly on Monday, as the market again moved past the momentum-driven selling that rounded out last week, and which removed a significant degree of froth from conditions. The bull case remains a solid one here, amid runaway fiscal spending, and the risk of inflation expectations un-anchoring, coupled with frankly insane levels of physical demand from both retail investors, and reserve allocators. If there is a bear case, here, I’d love to know it, so answers on a postcard please, but for the time being I continue to like both gold and silver higher.

I also continue to like the USD higher as well, but in all honesty have become so bored by action in the FX space of late that I’d rather be watching paint dry. The buck looks good, as the DXY continues to trade above its 50- and 100-day moving averages, and as the Fed’s ‘run it hot’ approach tilts risks to the outlook firmly to the upside. Add to that, the whole ‘cleanest dirty shirt’ idea, where there’s really nothing else in G10 worth buying, and you – to my mind – have a pretty solid USD bull case. ‘Mr Market’, however, seems content to just meander about for the time being, and it seems like we need some sort of external catalyst to breathe some life into proceedings, before that trade really starts to charge on.

Such a catalyst seems unlikely to come from carry, for the time being, not least after the benchmark 10-year yield slid back under the 4.00% handle yesterday. I bailed on my steepeners a while back, as the market appeared unfazed by the erosion of Fed policy independence, and have really been at a bit of a loss ever since.

I guess flattening seems to be the path of least resistance right now, but I struggle to argue a case for 2s significantly under 3.50%, and 10s a chunk under 4.00%, in a world where we’re talking about US outperformance, sustained higher inflation, and a generally positive vibe in terms of risk appetite. Absent a material, and likely unexpected, downside macro surprise, I remain inclined to fade upside in Treasuries, especially at the long-end of the curve.

LOOK AHEAD – Another day, another dearth of US data, as the government shutdown continues, with no end in sight.

As such, the data scraps that we have to feed off today are just the latest UK public borrowing figures (which will be grim), and last month’s Canadian inflation stats (which won’t deter the BoC from a cut next week).

Besides that, we do hear from ECB President Lagarde, which I’m sure is just what we all need, though mercifully the FOMC are now well into the pre-meeting ‘blackout’ period. We do, however, have a busy slate of corporate earnings today, highlighted by the likes of 3M (MMM), Coca Cola (KO), and Netflix (NFLX).