US Election – Biden leads, blue wave likely.
The election is 8 days away, and our latest estimates forecast 88% probability of Biden winning and 61% chances of a Blue Wave. Our Twitter analysis revealed more negative sentiment for Trump following the final debate on Thursday night. Pennsylvania and Florida remain key states. In markets, Biden – especially in a blue wave – should be positive value trades, inflation, and non-US assets, and negative for the Dollar and Treasuries. We see more room for these trades to work.
Rates – Duration desperation.
The zero-yield environment is pushing investor to chase every basis point in traditionally “risk-free” assets. We fear this may be like picking pennies in front of the steamroller. New EU common issuance saw record demand of €233bn for -0.25% yield. For the new Italian BTP issued last week, a 5 basis point discount to the curve brought about €90bn of orders, more than 11x the amount on offer. 10y bonds now yield -0.6% in Germany, -0.3% in France, 0.8% in Italy, vs a 1-1.3% average inflation in most European countries over the past 10y. A small move up in inflation or further global fiscal stimulus would have easy time bringing “safe” government bonds down 5-10%.
China – Solid footing.
We expect recent Renminbi appreciation to continue, as three divergence trends favour China. First, the economy keeps outperforming Europe and US, both looking at leading indicator and realised data (Q3 growth, out last week, was 5% year-on-year). Second, a bottom-up approach to the pandemic is de facto preventing a second wave, as opposed to Europe. Third, China didn’t expand monetary policy vs massive global loosening. Such set of factors was worth already a 7% appreciation since May, but is well set to continue into next year, making it possible for CNH to test low 6s again. Asian equities will continue to be also strong beneficiaries of the trend.
Turkey – Instability grows.
The recent central bank meeting illustrates well why Turkish assets are bound to deteriorate despite already weak levels. The CBT missed the opportunity to hike rates on Thursday, showing excessive relax about recent lira stability. Needless to say, such stability was gone a few minutes post meeting. Large imbalances and bleeding reserves would suggest a proactive approach, while authorities stubbornly pursue a reactive/loose stance. Experiences in many emerging markets show that these vicious dynamics often lead to a realization moment once it is already too late, and we think Turkey makes no exception. An additional 20-30% depreciation and an old style BoP crisis are a matter of time, in our view.
This document is issued by Algebris (UK) Limited. The information contained herein may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of Algebris (UK) Limited.
Algebris (UK) Limited is authorised and Regulated in the UK by the Financial Conduct Authority. The information and opinions contained in this document are for background purposes only, do not purport to be full or complete and do not constitute investment advice. Under no circumstances should any part of this document be construed as an offering or solicitation of any offer of any fund managed by Algebris (UK) Limited. Any investment in the products referred to in this document should only be made on the basis of the relevant prospectus. This information does not constitute Investment Research, nor a Research Recommendation. Algebris (UK) Limited is not hereby arranging or agreeing to arrange any transaction in any investment whatsoever or otherwise undertaking any activity requiring authorisation under the Financial Services and Markets Act 2000.
No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris (UK) Limited , its members, employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.
The distribution of this document may be restricted in certain jurisdictions. The above information is for general guidance only, and it is the responsibility of any person or persons in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. This document is for private circulation to professional investors only.
© 2020 Algebris (UK) Limited. All Rights Reserved. 4th Floor, 1 St James’s Market, SW1Y 4AH.