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Melt-up

Come winter season in the northern hemisphere, the debate is all about things ‘heating up’. First, it was about the spike in energy prices and its inflationary impact. Now, with the COP26 meeting in Glasgow, the focus has moved to global warming.

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Key take-aways

  • The heat is on for global warming, the global pandemic, and China real estate. Stock markets stay in melt-up mode, as most of this keeps central banks from tightening.
  • The year-end rally quite advanced, we spot further upside in cybersecurity/cloud computing – or in inflation assets such as silver.

The big relief here is that the global consensus has not completely fallen apart. However, we struggle to show too much enthusiasm given how far the world is from the agreed temperature trajectory (see number of the week). It was also quite ironic to see that the latest relief in energy prices was about record coal production in China and natural gas deliveries to Europe — this just highlights the trade-off between short-term pain points in energy supply versus long-term climate goals. Elsewhere, the heat is back on concerning the pandemic. The picture is quite inconclusive about what is next for — again — the northern hemisphere entering the winter season, with worrying infection trends so early on.

Policy mistakes
Financial markets seem to be following the media mantra of ‘only bad news is good news’ for now, as the major showstopper for the economy and markets would be a premature ‘back-to-normal’ attitude by policymakers. We have been highlighting the fact that policy mistakes are the biggest risks right now. Some of the current pain points reduce the likelihood of someone at the headquarters flicking the switch too early back to ‘tightening’. Japan has a legendary collection of such moves in the past thirty years when policymakers presumed the worst was over and reversed their policy path only to experience the nightmare all over again.

Conclusion for investors
Granted though, the year-end rally is quite advanced with stock markets up this quarter-to-date by almost +10%. We still do not see the need for major adjustments, but stay in the course instead and refine some of the positions. Elsewhere, we spot opportunities in some of the inflation-related assets, such as silver, that have traced out major bottoming formation as of late.

Number of the week

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