(25 AUGUST 2020)DAILY MARKET BRIEF 1:Unbacked shot of optimism sends S&P500 to fresh highs.

The S&P500’s (+1.00%) fresh rise to historical high levels on Monday proved once again that investors see what they want to see only. Yesterday’s stock rally was backed by virus treatment optimism amid the FDA approved emergency use of convalescent plasma treatments on hospitalized patients over the weekend. While the impact of the latter statement is difficult to gauge for an average investor with no medical background, it is not the first and certainly not the last news of this kind. On the other hand, in Hong Kong was reported the second reinfection case, which we understand better, hinting that an earlier contamination, or even a vaccine, may not stop the virus from spreading. Good news was that the second time symptoms were softer on the HK patient, but there is clearly not enough evidence to tell that it would be the case for everyone.

Therefore, to us, news is not particularly good, but the market sentiment appears to be. The stock price inflation is full on and demand in sovereign debt remains solid with however an increasing number of leading investors ringing the alarm bell regarding the fact that the artificially suppressed DM government debt yields do no longer compensate for the rising default risk of governments. More worryingly, the surging inflation expectations will soon be clearly reflected in actual inflation levels and have a dramatic negative impact on debt yields. The latter situation could wreak havoc across the sovereign debt markets and cause a rapid sell-off within what investors believe to be a ‘safe’ asset class. So, the cheap liquidity is rising the risks across all markets, not only equities where the price-to-earnings ratio for many stocks do no longer make sense.

Tesla, for example, has a P/E ratio a touch below 1000, versus the average ratio of 15 among carmakers. Zoom trades about 1600 times its earnings. Overvalued?

But on the other hand, the excess liquidity should find a place to go and the slippery market environment pushes liquidity into the big names.

Airline and consumer stocks were among the biggest winners on Monday. Nasdaq (0.60%) lagged.

Stocks in Asia traded mostly higher on Tuesday. The ASX (+0.17%) and CSI (+0.24%) recorded timid gains, Nikkei rallied 1.77%, while Shanghai’s Composite (-0.19%) and Hang Seng (-0.53%) gave a part of Monday’s gains.

Activity on FTSE (+0.30%) and DAX futures (+0.73%) hint at a consolidation of the strong Monday advance.