After a brief period of market volatility, it feels as though things have returned to where they were. However, though market indices have recovered, the great rotation (into value and small caps) that seemed to be starting in early July has not returned. A weak US economy may delay that rotation but Paul expects it to reemerge.
One pre-volatility trend that seems to be reasserting itself is the weakness of the Japanese yen (and strong performance of Japanese stocks). With interest rate spreads so generous (US versus Japan), Paul understands why carry traders are tempted to reopen those trades (effectively shorting the yen and going long dollar). Hence, yen weakness may persist but he suspects that once the Fed eases aggressively (and the BOJ tightens), the yen will appreciate a lot, which he thinks will hurt the relative performance of Japanese stocks (in local currency terms).
There has also been a rotation in US politics, with a reversal of the opinion poll lead of Donald Trump, as VP Kamala Harris replaced President Biden as the Democratic Party candidate. Paul warns that the opinion poll margins are too narrow to be confident of the 5 November outcome but he now feels more confident about his January Aristotle List prediction that Democrats will win two of the three big races (White House, Senate and House of Representatives). It is too soon to know if the recently announced Harris economic package will help. What seems clear is that fiscal consolidation is not a priority for either presidential candidate, which he fears could eventually be a problem for financial markets.
