Good Morning.. Well, that was something of a wake-up call, especially for a lot of retail accounts that felt buying stocks was an one-way bet. I think there were a number of factors like the concern over a rise of infection in the US after unlocking but also a gloomy Powell and oil. On the latter, I note with some concern that oil is falling again and may spook an already nervous equity market. Running risk into this weekend is not for the faint-hearted and I think buying this dip in stocks is still risky. If stock do hold then I can see the EUR climbing again but as I am unsure about stocks today, I prefer the crosses and we have EURAUD (which we added to yesterday at 1.6500) and EURGBP where I see concerns over Brexit still and data this morning was pretty awful. But to be honest, most FX moves are the same trade as oil and others are all related to moves in equities. Not a lot of tier 1 data today but Michigan confidence numbers may be worth a look. But I think we could have a choppy and nervous session today and it’s a Friday so “Be careful out there”…

Keep the Faith..

Details 12/06/20

Wake-up call!

–

I certainly don’t want to sound smug but that steep sell-off in global equities yesterday was on the cards and I think some participants who were relatively new to the game, discovered that these markets can bite and that there is no such thing as a one way bet or a sure thing. The euphoric nature of the rally was a concern a while back and I think the market turned for a couple of reasons. The market commentary suggests that the move was based on fears of a second wave of the virus striking America but in addition to this I think markets have caught up to where central bankers are now and that gulf between their negative stance on many economies and the optimism in global equities was never going to last; reality struck and struck hard. I also think oil had a role to play in all this and I think we may have a high in place for a while. The move had quite a few side effects and one was the rise in the USD but to be fair, the resilience of the EUR for most of the day yesterday was impressive until it finally cracked against the USD just after 6pm London time.

But the EUR held quite well on the crosses with EURAUD breaking above 1.6500 (triggering my stop entry to add to longs) and EURGBP breaking back above .9000 briefly.

That is a EURAUD daily chart above and we are moving back above the central moving average of my choice of Bollinger bands (I was a little concerned we did not close well above 1.6500). The techs are starting to support the fundamentals in many EUR crosses and we still have to consider the chances of a no deal exit with regards to Brexit. It is suggested that Boris will head to the EU to meet Von der Layen the week commencing June 15th. We may get some compromise at that meeting (or both sides may throw in the towel) but into the meeting, I think there is a danger that we get some strong combative words from both sides as part of the art of the deal. I still think we have the makings of a fundamental shift in the EUR and that EUR strength can continue against many currencies still. If stocks now hold and start to climb, then EUR should start to head back to test key resistance at 1.1497 against the dollar.

Overnight, after a weak start, we have seen a decent recovery in most Asian markets with the Nikkei down just 1% and considering the carnage on Wall St, that is a result! The trouble is that I am not sure Friday is a good day to be entering a long position as markets now are fragile and susceptible to all sorts of news from further rises in virus cases in the US, social unrest this weekend (watch Seattle) and who knows what Trump may come up with. Also we have seen some big moves in bonds and USTs were no exception with a 7 big figure rally this week in the 30yr! We are seeing a small reversal this morning as stocks hold but a move back below 3000 in S&P may spook investors again. A lot of the popular stocks pounced upon by retail investors got hammered back into some form of reality; but some things are still defying common sense here. It is reported that Hertz are seeking to sell $500 million in bankrupt Hertz stock (or 246,775,008 HTZ shares) in a “unique opportunity” to “raise capital on terms that are far superior to any debtor-in-possession financing.” This is insane. Retail investors are being mis sold a product here by a bank (Jeffries). Why would anyone want to buy into a company that has filed for Chapter 11? I can see why Hertz want to take advantage of the ridiculous run up in their stock but really? Hopefully retail investors learnt a valuable lesson yesterday and stay well clear of this garbage offer.

Interestingly, with a new set of virus stats suggesting a second wave in parts of the US, Mnuchin said he would not want to lockdown the US economy again and so I guess he is prepared to allow people to die! This was a strange statement for a Treasury Sec. to make in all honesty but it seems the US administration has made a decision on livelihoods over lives. We still don’t know what the unlocking of economies will bring and a lot of the equity rally was based on unlocking being good news. I think US equity markets will be very sensitive now to any virus statistics now. The problem is that many currency pairs are solely driven by stock market moves; in fact most assets seem to all be the same trade; either risk on or risk off. The easy move in the USD recently has been seen, as it trended down 10% as stocks rallied but yesterday turned this into a two-way market now. Sad really and again this morning we see some pretty shocking UK data have absolutely no initial impact; in fact, Cable rallied immediately after. The UK economy is looking very weak and I realise many other economies do too; but the UK looks like it may take longer to recover. We need a Brexit deal as we lack foreign investment but a deal is far from guaranteed. Also, UK Mortgage lenders are backing away from first time buyers who have small deposits and that is the first rung of the housing ladder that supports the whole sector. Housing has a massive impact on the psyche of the UK consumer; the wealth effect.

I still think that we need to consider the risks of continued high unemployment levels and its impact on the consumer, who is, after all, 70% of most developed economies. Even the Fed chairman, in his FOMC-meeting news conference Wednesday, expressed his bafflement with the chaos in the unemployment data being reported by two government agencies that differ by give-or-take 9 million unemployed, which is huge. The Department of Labour reported that 29.5 million people were receiving state or federal unemployment insurance benefits (not seasonally adjusted). Meanwhile, the Bureau of Labour Statistics reported last Friday in a shock-and-awe data set that only 21 million people were unemployed based on household surveys, though it acknowledged a shock-and-awe systematic error and that without this error, it would have reported 25 million as unemployed. But the point here is that there is a danger that we see a slow return to work and many may not have a job to go back to. This matters hugely in my opinion and will dent the confidence of the consumer. We are moving into earnings season soon and I am sure many have cost cutting on their minds.

The total number of people who have lost their work – employees and gig workers – and who are still out of work must be above the 29.5 million insured unemployed because many people don’t qualify for any benefits. I don’t know where this final number is, but it is likely well above 30 million and some of the bail-out benefits are due to run out in July. Even many of those that do go back to a job may have very real concerns about how secure that job is and that again impacts spending habits. Fed policy at present is NOT going to create growth and we have seen this made clear in Japan where the data is still appalling as underlined yet gain by data overnight. This, after all they have done with QE, buying ETFs, REITs and YCC. Yet here we are watching the Fed and others follow the same path. In the US, people’s frustration and anger with racial injustice has boiled over, and they’re frustrated and angry over a host of systemic issues, including the inequality of economic prospects and there have been big protests every day around the country for well over a week.

This is, in part, due to Fed policies that see printed money shoved into the system of Wall St and not Mainstreet. The Fed printed $2.9 trillion since early March. That’s about $22,000 per household. For the bottom half of households, $22,000 would have helped a lot to get through the crisis. There is no benefit from further easing to the man on the street as mortgages will not go negative and they do not need/want more loans/debt and nor should they. This wealth divide is starting to eat into the heart of the US social structure and is a cancer if not dealt with. History shows us that ignoring this brings change but often takes a very bloody period to adjust. America is beginning to look a lot like Rome is its final days; social unrest, picking fights everywhere and turning insular. What the global economy needs now is harmony and unity but we are seeing the polar opposite. Weaker global growth looks likely and that means weaker earnings and that means stocks will continue to have days like yesterday and a lot of the blame rests firmly on our central bankers. What really concerns me is that we have central banks undermining the very foundations of capitalism (as nothing is allowed to break and rebuild) while governments are chipping away at the foundations of globalisation. If those two don’t bring about a radical change then I don’t know what will but the chances of sustained growth look limited.

—————————————————————————————————————-

Strategy:

Macro:.

Long EURGBP @.8978 added @ .8940. Stop at .8825

Long EUR @ 1.1360.. Stop at 1.1200ish. Added at 1.1285.

Long EURAUD @ 1.6260 added at 1.6500. Stop now at 1.6260.

Brought to you by Maurice Pomery, Strategic Alpha Limited.

—————————————————————————————————————-

Strategic Alpha Report Disclaimer

Doo Prime endeavor to ensure the reality, adequacy, reliability and accuracy of all the information provided, but do not guarantee its accuracy and reliability. All the information, analyses, comments, statements, and/or data provided in this report is for information purposes only. Client’s use of any contents of the report as the basis for the transaction, the client shall fully aware of the risks and agreed to bear all the risks. Client shall cautiously judge the accuracy of the information. Doo Prime has no liability for any loss caused by any inaccuracy or omissions of the contents and subjective reasons of Client.

Risk Warning

This information is powered by Strategic Alpha. Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice.