US stocks rebound despite a contentious election outcome and surging Covid rates
US stocks bounced strongly last week, despite the fact that market’s worst fears about a potentially contentious US presidential election results have clearly transpired. Although a change in leadership in the White House started looking inevitable by the end of the week as the votes tally advanced, it is important to note that the rally in stocks was initially sparked when Mr. Trump looked more likely to clinch victory before the mail-in ballot counts tipped the balance in favour of Mr Biden in key swing states. Interestingly however, this swing in ballot counts had very little impact on the direction of stocks leading the rally. To to us on the outside, this market bounce felt more of a post-election relief rally that looked almost pre-programmed irrespective of the outcome.
The clear winners were big tech stocks on reportedly large short-covering programs combined with a notable come-back from US retail investors. S&P managed to bounce back to above its 3500 highs it had tested in August and mid-October. Nasdaq followed a similar pattern while more surprisingly, SOX index which represents US semiconductor names blew past October highs to reach another all-time level. Meanwhile, VIX or the fear gauge index plunged back below its key daily moving averages and near its vital 24 level support.
With the White House looking to legally challenge the results in many states, clearly the transition of power next January will not be a smooth one and some civil unrest until January seems possible. With some key senior Republican Party leaders now supportive of Mr Trump challenging the election results, adding more fuel to the fire, chances of agreeing on any fiscal stimulus this year has evaporated, leaving the Federal Reserve to do all the heavy lifting once again and that is putting the US dollar under renewed selling pressure. In the meantime, Covid infection cases in the US have been soaring to record highs, far surpassing the grim 100K milestone while in Europe, most regions are implementing at least partial lockdowns to try to control the spread.
Nikkei hits its 29-year high as Japanese corporate earnings improve
Although the US market bounce took us by a surprise, our own market in Japan was not left behind and is trending in line with our more positive outlook. The Nikkei surged towards its 29-year high thanks to a big rebound in blue-chip names. The broader Topix index which is our key benchmark rallied to its September highs and is less than 1% away from closing that bearish gap formed in late February. Indeed, the bulk of Japanese corporate earnings results have proved more positive than anticipated as we had hoped with most firms guiding their full term projections higher.
As we have also noted, with end-demand in China recovering nicely, Japanese consumption improving and auto sales in the US also looking much healthier, some key segments of Japan’s industry including upstream auto plays and capital goods-related segments are showing notable signs of improving business conditions. Although the prospects of renewed lockdowns in Europe and potentially the US should not be dismissed and could very well slow activity once again, the general recovery trend in Asia looks well under way as Covid infections in the region remain mostly under control for now, leaving Japanese firms well placed to see stronger earnings recovery trend in this current quarter.
Why stronger yen is unlikely to derail Japan stock market rally
However, once again, we like to highlight the caveat of our forex outlook as we continue to believe the yen is trending towards parity against the US dollar and having last week broken below that crucial 104 level, we see little support in the short term as BOJ looks to have very little room left to further loosen its monetary policy. This we think could provide some headwinds to higher share prices but not enough to derail the market rally.
Indeed, it is important to note that the Japanese currency is trading far more steadily against the Chinese yuan which we deem as more important given that China remains Japan’s largest trading partner by far and the strong recovery we are witnessing in Chinese economic activity. These factors along with potentially less hawkish US trade policies towards China under a new US administration leave Japan stocks possibly best placed within the developed equity market asset class, especially given relatively strong corporate balance sheets and their compelling market valuations.