All green, bar debt
A global market rally that was largely catalysed by US stock market outperformance following the US election has extended for a fifth consecutive day. The rising tide of global markets appears to be carrying the majority of asset classes, bar one: debt. Despite an initial unwinding of so-called ‘Trump trades’ immediately following the election, the result of the US election is having an undeniable effect upon equity markets. In particular, pro-cyclical corners of US equity markets, for instance the Russel 2000, have delivered a strong post-election performance.
What is stunting the performance of other US indices is the fear of a rising cost of capital. As the price of US treasuries has fallen, so too has the price of most corporate debt, raising yields throughout the curve. High price to earnings technology stocks do not perform well in such a scenario with high levels of debt and capital intrinsic to their operating models. So far, it seems that a falter in tech-heavy stock indices has not managed to undermine the wider risk-on rally.
The US dollar has and will outperform in such markets. Emerging markets continue to be volatile whilst the balance between the pro-growth and protectionist sides of the President elect continue to be established. The market will now look ahead to US CPI due on Wednesday for a reality check of how the economy looks today versus how it may look in 2025.
Discussion and Analysis by Charles Porter
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