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A nail in the coffin for the largest QE trade

Weekly investor research

29 October 2018

The rise in US company costs exposed by the latest round of results is by far the most important change in the global financial landscape in the past couple of weeks. The results show that rising costs are now directly eroding earnings in some sectors of the US economy. If sustained, cost pressures will become more pervasive and could threaten the single largest consensus trade since Quantitative Easing (QE) began in 2010, that is, to be long US equities. Two other big ‘QE trades’, namely being long Dollars and being short everything in Emerging Markets (EM), already began to unwind in early 2016. While these two trades were interrupted in 2018 due to US fiscal and trade policy interventions designed to help Republicans win the upcoming midterm election, the interruptions are likely to prove temporary. After all, the US fiscal stimulus will fade and trade policies only impose more and more costs on US businesses. Against this backdrop, we expect the Dollar to resume its decline in 2019 accompanied by stronger EM markets, but possibly now also accompanied by a worse performance for US stocks. Certainly, it will be difficult to reverse the new trend of rising costs facing US companies as long as the current policy mix is maintained. Given the heavy positioning in US stocks, asset allocators may well find themselves getting very busy soon.

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