Good Morning.. A strong session in Asia as China authorities encourage the retail accounts to buy and buy they dutifully did, taking stocks up 4%!! This has seen the USD fall and I can see this extending to be honest as there seems less demand for the USD. The swap lines offered by the Fed are not being utilised and the repo issue seems to have passed for a while. Plus, due to the sheer size of the issuance coming, the Fed is likely to be back buying USTs at some point and that will take stocks higher and the USD lower. I still like the EUR higher and see a break of 1.1348 targeting 1.1500 and a break of 96.05 in the DXY could see a new lower trend start to develop. There is a battle in Sterling as Sunak and the government spend but the BoE is about to embrace negative rates and Brexit talks are still not making any progress at all. There is every chance though, that the EU emerges from this crisis earlier and strong than the US, UK or Japan. EU retail sales and US PMI and ISM non-manufacturing to consider today..

Keep the Faith..

Details 06/07/20

V-shaped data does not mean a V-shaped recovery: Stocks in Asia higher and the USD lower:

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My title today may seem ambiguous but the point I am trying to make is that when you force an economy into a coma and then release it, the data will spike for a short period of time and that is exactly what we have seen recently and in the US NFP data last week. The collapse in the data due to the virus lockdown was “looked through” when the economy was locked and should be ignored as it is re-opened as the reality is not in this data; it will be evident later on in the year. Of course people will flood back into jobs after many were barred from working and furloughed but the real question is how many will not have a job to go back to and for how long? To my mind, this is the only question as unemployment may be the key to how quickly economies around the world can recover and right now, investors are keen to know who will be the leaders out of this crisis and who will be the laggards. There is a real danger that the unlocking of economies, especially in the US but certainly not contained to it, delays what many felt would be a global recovery.

The data last Thursday from the US labour report showed an improvement but only a third of the jobs lost have been regained and I think the market failed to grasp this and it may not recover to previous levels for a considerable time. The bare fact is that the number of permanent job losses now stands at nearly 3 million in June, up from 1.6 million people in February.

Even the Fed is forecasting 9% unemployed by year end, which is shocking. It is impossible to look at investments without focusing on the plight of the consumer and in the US, as is the case in many other economies, it is the consumer that drives growth. We saw a spike in US retail sales but again from when many shops and parts of the service sector were closed and so the rebound was expected but the question is if it can last. Consumers may now be far more fearful over job insecurity and their debt burden and any savings may well be directed at paying off some of this debt. The sudden increase in Covid cases in the sunshine states is a real problem, as California, Texas, Florida and Arizona, together represent about 30 per cent of the US economy and are suffering from a worrying upsurge in Covid-19 cases. Trump wants the country back to work as he is very aware that the state of the economy could decide the next election.

Trump wants more money to spend but will tax cut windfalls be spent on non-essentials? The problem for many consumers is that a larger percentage of their weekly/monthly budgets are going on food and essential costs. About one-third of the lost jobs have come from companies that have entirely ceased doing business and the rest are from those that have survived reducing their payroll numbers. My point has always been that even as many go back to work, it may be short-lived as companies rush to cut costs to survive or boost margins. I find it improbable at best that this scenario improves any time soon as we are yet to find a vaccine let alone deliver one. If we listen to our central bankers and especially the Fed, they are as concerned as I am. Even Goldman Sachs’ latest state-level coronavirus tracker calculates that 40% of the U.S. has now reversed or placed reopening on hold following the rise of cases and that will hit the economy and data in a month or so.

Macro research firm Capital Economics also shows (chart above) consumer foot traffic has stalled as cases surge and re-openings paused.

Mobility is important in all this and as the mobility trends stall, with the recovery set to reverse and businesses go bust, it’s only a matter of time before the economic realities set in that probabilities of a V-shaped recovery in the back half of the year are quickly fading. The recent upswing in economic data is likely nearing a peak and will not be the best news for future stock market gains. Bond markets don’t believe the hype, even though they are rather manipulated by the Fed now.

US stocks are still in a range and what I think we may be looking at in the US and indeed a few other economies is akin to a dead cat bounce. China data is starting to improve and we have seen out-performance in Chinese equity markets but with massive help from the central bank. Last night saw an impressive 4% rise in Shanghai stocks which took the whole Asia pacific region higher but OZ underperformed on virus outbreak concerns. Optimism was also stoked by a front-page editorial in the state-run China Securities Journal on Monday, that talked up the prospect of a “healthy” bull market. The article said investors could look forward “to the wealth effect of the capital markets”. Retail accounts dutifully went all-in.

EU stocks are also performing well and I still wonder if the EU may lead the US, the UK and Japan out of this, which may suggest the EUR maybe a little low still and I am sticking with the long recommendation but of course, they need desperately to get that joint bond issues sorted but I can see EUR trading as high as 1.1500 if we can break free of the recent range highs at 1.1348. But I also think the USD may weaken further here as we are not seeing the demand for the swap lines offered by the Fed and the repo issue seems to have calmed down. Cross ccy basis is no longer as stressed and with stocks holding, the USD could take a run at recent lows in my view. That global demand for USDs seems to have gone for now at least. If AUD breaks .7064 we could see another leg up there too and we are approaching the upper range levels now.

Sterling is an interesting currency right now as investors are torn between the bullish scenario of more spending from Johnson on infra-structure and the likelihood of more direct stimulus to the consumer from Sunak in the form of Stamp Duty holidays or vouchers to spend in Covid hit businesses against the growing likelihood that the BoE may embrace negative rates. According to the times, BoE’s Bailey has written to lenders warning them of the challenges negative interest rates would bring. Bailey told the Treasury select committee in May that negative rates were under “active review” (a U-turn on his previous position). The letter, sent last month, is a sign that the MPC may now be in agreement on this thorny subject but he did state that businesses would need 12 months to change computer systems, update financial contracts designed for a world of positive interest rates and work out how to communicate with clients. Does that mean they will wait? Plus, the most recent round of Brexit talks broke up without much sign of progress. Michel Barnier accused British trade negotiators of a lack of respect after Brexit talks ended a day early on Thursday amid “serious divergences” between the UK and the EU. The EU’s chief Brexit negotiator also last week blasted the U.K.’s plans for post-Brexit finance, calling them “unacceptable.” This dark cloud still hangs over the UK and time is running out, as a decision is needed by September at the latest, I would think, for businesses to be able to adjust.

The Fed and the central banks around the world have taken up the challenge and gone all-in with liquidity pumping and they may not be done yet, as central banks turn to monetising debt due to the sheer size of issuance. They cannot allow bond yields to rise on an over-supply issue. The move to bail out everything is understandable but deepens the risk that real GDP growth will continue to trend downwards on the zombification of the economy. It has been clear for many years that zero rate policies and QE do not generate growth; in fact we see the exact opposite. Governments and central banks are taking on larger roles in markets and the general economy and in financial markets we have lost price discovery completely. We are seeing a socialisation of economies where central banks and governments have a say in everything. Through direct and indirect lending, bailouts and grants, government spending in many countries will be more than 50% of GDP.

Government interests will have a strong voice in boardrooms and new government regulations are on the way to “save the economy and jobs” with taxpayer money. The fiscal revolution is here and austerity is a dirty word, banished and trampled by MMT. But the modern economies around the world thrive on free trade and free markets and both seem under severe danger of being eradicated as globalisation retreats. If ever we needed a united front against the virus and a choking global economy, it is now and yet we seem destined to put the global economy into reverse and drive it back to a protectionist world and that threatens everything including global peace. Think I am being dramatic? Keep an eye on the US Naval movements/actions in the South China sea or the border skirmishes between India and China or north and South Korea or Russia’s expansionist plans or Israel threatening Iran. America is stepping back from the global stage in my view under Trump and becoming insular and that leaves an almighty void and many may feel that the US may not so readily intervene if they try their luck. All this comes from de-globalisation and the socialisation of free global markets in my view. Globalisation helps ensure global harmony.

For global stock markets, the irony is that with so much debt being generated, markets may well remain bid as central banks will be forced to expand balance sheets to soak up all the issuance. It is very clear how sensitive equity markets are to balance sheets and I can see a time when the Fed is forced back into buying USTs as the size of the issuance swamps demand. The Fed will again be the buyer of last resort and paradoxically, this will drive stocks ever higher.

S&P (above) is going sideways at present but the likelihood is that the issuance piling up in the pipe is going to need the Fed to step back in! This 2910-3250 range may well be taken out if I am right, on the topside. With the Fed less keen than thought on YCC, I see no alternative, as higher yields are NOT an option. This may also weigh heavily on the USD from here on in.

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Strategy:

Macro:.

Long EUR @ 1.1210.. Stop at 1.1150

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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