Risk sentiment looking slightly more positive this morning.

In Asia, the ASX closed down 0.27%, Japan returned from holiday to post a a minuscule gain in the Nikkei.

S.Korea's KOSPI fell ~3% during the session, but later recovered to -0.7%.

South Korea’s financial regulator said it will lift its ban on short selling of listed shares starting March 15 - the ban was introduced in March last year (amid the Covid fallout) to curb speculative trading.

KOSPI has gained almost 120% since the ban - guess the plan worked?

U.S. futures starting to perk up, commodity currencies & GBP gaining against the USD.

Bitcoin & Ether both looking to push higher after the recent selloff.

The U.S. 10 year now yields ~1.15%, as the reflation trade picks up steam, and positiver comments from Fed officials.

Fed Officials See Strong U.S. Rebound, Fanning Talk of Taper

Federal Reserve officials said that more fiscal support and the mass distribution of vaccines could lead to a strong U.S. economic recovery in the second half, setting the stage for a discussion of potential tapering of bond buying before year’s end.
“I do think you’re looking at a second half that is going to be very strong and the question I think is how do we get through where we are today to that second half,” Fed Richmond Bank President Thomas Barkin, who votes on monetary policy this year, told CNBC in an interview Monday.
The Fed last month signaled interest rates would stay near zero at least through 2023 and said it would keep buying bonds at a $120 billion monthly pace until it has seen “substantial further progress” toward its goals for employment and inflation.
“I’m open to that” potential late-2021 tapering, Fed Atlanta Bank President Raphael Bostic told reporters after a speech earlier in the day. “A lot of it will depend on how the virus and the vaccine distribution goes. But if it goes well -- if we learn quickly -- I think there is some good upside potential.”
Dallas Fed chief Robert Kaplan, speaking later on Monday, said he was hopeful the economy would rebound sufficiently to at least allow the conversation about tapering to begin later in 2021.
ed officials have stressed that tapering of bond buying would be communicated well in advance to avoid a surge in Treasury bond yields. Vice Chair Richard Clarida said Friday he doesn’t expect the central bank to begin tapering its asset purchases this year despite an expected strengthening of the economy.
The debate recalls the 2013 taper tantrum, when the unexpected disclosure by then-Fed Chairman Ben Bernanke that officials were thinking about dialing back their asset purchases provoked violent financial market volatility. Barkin made clear that they did not want a repeat.
“I think we have learned lessons certainly from six or seven years ago,” he said, noting that Fed Chair Jerome Powell was at the central bank during that episode. “I expect us to do our best to communicate well there.”

Morgan Stanley; "The Cyclical/Defensive Ratio is Signalling Higher Yields Ahead – We Have High Conviction in Our Call for Higher Rates"

@Scutty / Morgan Stanley

Based on this metric alone, there is an argument that equities are looking too far ahead or yields are lagging (or both).

On that note...

Stock markets’ extreme valuation gaps divide veteran investors

Oaktree’s Howard Marks says valuation metrics unhelpful, after GMO’s Jeremy Grantham warns investors off tech stocks.

Two high-profile investors have offered differing strategies to deal with the dizzying valuation gap between growth stocks and beaten-up sectors: trust in bargains, or set aside traditional valuations.

So-called value stocks in sectors such as finance and energy — badly hit in the coronavirus crisis — have accelerated their recovery in the past week, buoyed by the Democratic party’s gains in Senate run-offs last week that point to enhanced government support for the US economy. Meanwhile, growth stocks, particularly in US tech, continue to break records with only minor setbacks.

But in a memo to clients on Monday, veteran distressed debt specialist Howard Marks warned that while it was “easy to be seduced” by low valuations, “investing on the basis of rote formulas and readily available fundamental, quantitative metrics should not be particularly profitable”.

The Oaktree Capital founder’s comments come days after Jeremy Grantham, co-founder of GMO, warned of a “bubble that is beginning to look like a real humdinger” in stocks. For him, one solution is to avoid big tech as much as “your career and business risk will allow” and to focus instead on emerging markets and on value stocks.

The contrasting viewpoints reflect the difficulty fund managers face in reducing dependence on a small clutch of tech stocks and hedging against the risk of a market pullback while also resisting cheap stocks whose valuations fail to keep pace.

In his memo, Mr Marks said the apparent distinction between growth and value stocks is neither “essential, natural or helpful, especially in the complex world in which we find ourselves today”. Often, he said, “if something carries a low valuation, there’s probably a good reason”.
Unlike in previous decades, granular data on companies and markets are now easy to come by, making picking out overlooked bargains more of a challenge, he said. As such it “doesn’t make sense” for value investors to avoid highly-valued stocks or popular Big Tech names, he added.
Mr Grantham, meanwhile, wrote last week that he is “waiting for the last dance” in exuberant markets. “Make no mistake . . . this could very well be the most important event of your investing lives,” he said, pointing to examples of “crazy” investor behaviour.
“Value stocks have had their worst-ever relative decade [compared to growth] ending in 2019, followed by their worst ever year in 2020, with spreads between growth and value performance averaging between 20 and 30 percentage points,” he said. Emerging markets equities have similarly suffered their worst run compared with the US in about half a century.
“We believe it is in the overlap of these two ideas, value and emerging, that your relative bets should go,” he concluded.

Jeff Gundlach says stock market valuations are extraordinarily high, supported only by the Fed

Jeffrey Gundlach, founder and CEO of DoubleLine Capital, raised concerns Monday about the stock market’s elevated valuation relative to historical levels and believes rising inflation could upend investors this year.
“At extraordinarily high valuations is where we are, and its being supported by massive amounts of stimulus,” Gundlach told CNBC’s Scott Wapner on “Halftime Report.”
“If you go back four decades of stock market data, there are many valuation metrics that are in the top 1 percentile of overvaluation. So, the thing that’s keeping it going, of course, is the Fed with rates at zero and promises to stay at zero,” Gundlach added. This “allows for valuations to be record-breakingly high.”
Gundlach also noted that several trends that had been in place for about a decade are now reversing. He said emerging markets are starting to outperform the U.S., value is leading growth and companies with weaker balance sheets are outpacing those with generally stronger ones.
“Things are definitely changing. The leadership of the United States being a top-performing market for 10 years basically has seemed to reverse,” he said. “A lot of things are changing. I suspect this is not a short-term phenomenon.”
Another change that could put pressure on stocks moving forward is the possibility of rising inflation as the Fed pledges to keep rates low and its monetary stimulus programs running.
Gundlach pointed to a comment made by Chicago Fed President Charles Evans on Jan. 4. Then, Evans said, “The more we get inflation up above 2% then markets are going to understand that, yes, we’re in it to win it.”
Gundlach, who expects the consumer price index — a widely followed inflation metric — to hit 3% in its May/June report, said inflation “is a real game changer, should it occur.”

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Japan's price expectations weaken as pandemic stokes deflation fears

Japanese household inflation expectations hit an eight-year low in the three months to December, a central bank survey showed on Tuesday, suggesting the coronavirus pandemic has heightened deflationary risks in the world’s third-largest economy.
The outcome highlights the challenge the Bank of Japan faces in firing up inflation to its elusive 2% target, and keeps it under pressure to support an economy hit by a newly issued state of emergency to combat the pandemic.
The ratio of households who expect prices to rise a year from now stood at 60% in December, down from 63.3% in September and hitting the lowest level since December 2012, the BOJ’s quarterly survey on households showed.
In a sign deflationary pressure was already heightening, the ratio of those who thought prices have risen from a year ago fell to 60.5% in December from 65.9% in September, it showed.
Households’ sentiment on the state of the economy improved somewhat but hovered near lows hit in 2009, when Japan was reeling from a global financial crisis triggered by the collapse of Lehman Brothers, according to the survey.

This is unlikely to help;

Japan to widen state of emergency beyond Tokyo as virus surges

Japanese Prime Minister Yoshihide Suga told a meeting of ruling party executives on Tuesday he would declare a state of emergency for the three western prefectures of Osaka, Kyoto and Hyogo to stem the spread of COVID-19, Kyodo news reported.
Responding to pressure from Tokyo and three neighbouring prefectures in eastern Japan, Suga last week declared a one-month state of emergency for that region until Feb. 7.
But the number of coronavirus cases has also climbed in the west, prompting Osaka, Kyoto and Hyogo to seek a state of emergency too. The government is finalising plans to do so on Wednesday, and could also consider adding the central prefectures of Aichi - home to Toyota Motor Corp - and Gifu, Kyodo reported, citing government sources.
Adding those five prefectures would mean a state of emergency for about half of Japan’s population of 126 million people.

China plans further Hong Kong crackdown after mass arrest

The arrest of more than 50 democrats in Hong Kong last week intensifies a drive by Beijing to stifle any return of a populist challenge to Chinese rule and more measures are likely, according to two individuals with direct knowledge of China’s plans.
While stressing that plans haven’t been finalised, the individuals said it was possible that Hong Kong elections - already postponed until September on coronavirus grounds - could face reforms that one person said were aimed at reducing the influence of democrats.
Both individuals, who have extensive high-level experience in Hong Kong affairs and represent Beijing’s interests, spoke on condition of anonymity.
Beijing’s involvement was “substantial” in driving and coordinating actions with the Hong Kong government, said one of the individuals, a senior Chinese official.
He told Reuters the latest arrests were part of a wave of ongoing actions to silence activists and to “make sure Hong Kong doesn’t slide back to what we saw 18 months ago,” when massive demonstrations marked the boldest public revolt against China’s leaders since the Tiananmen Square protests in Beijing in 1989.
China has been “too patient for too long, and needs to sort things out once and for all,” he added, saying more tough moves would be rolled out for “at least a year”.

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Looking ahead, not much of note on the calendar today.

The Trump impeachment theatre is likely to continue, although this is unlikely to have any market impact.

A day of central bank speakers and yield-watching awaits...