Good Morning.. A decent fall into and indeed after the US close last night due to a couple of factors with Fauci suggesting early unlocking is dangerous and Trump’s administration seemingly going after China again. But due to the Powell speech later today, Asia equities had little appetite to trade and US futures have ticked higher. But with low volumes and a rather speculative/retail feel to this last part of the equity rally, I am a little concerned as a fast move down seems likely to me at some point, especially if Trump decides to use sanctions again against China. Stocks, the AUD and the Chinese administration won’t like that at all (watch CNH). Trump is playing a dangerous game here as stocks are extremely vulnerable…I remain bearish AUDJPY and again we failed to take out 70.20 yesterday. Meanwhile we saw GBP weakness after the Broadbent comments on negative rates and I still see Cable lower from here despite slightly better than expected UK data this morning. But Sunak is thinking of tax hikes to pay for all the spending but good luck with that as we enter a recession with mass unemployment. NZ and many others are all talking about negative rates as an option so the market will be glued to Powell comments later. Central bankers still seem far more fearful than equity investors. In fact, some are even discussing the threat of a depression and I see ECB’s Lane has a speech on that today at 17:00 BST!
Keep the Faith..
Data.. All Times BST
10:00.. Eur Ind Production m/m Cons:-12.1% Prev:-0.1%
13:30.. US PPI Core m/m Cons:-0.1% Prev:0.2%
US PPI y/y Cons:-0.2% Prev:0.7%
Speakers:..
12:00.. ECB Speaker: Lane (Very Dovish), virtual interview at University of Amsterdam
14:00.. Fed Speaker: Powell (Neutral), Discusses Current Economic Issues
16:00.. ECB Speaker: Guindos (Dovish), Speaks at ESADE Alumni Event
17:00.. ECB Speaker: Lane (Very Dovish), on “Can prolonged depression be averted?”
Details 13/05/20
Broadbent sends GBP lower as Fauci unnerves markets: The Consumer is everything and China is back on Trump’s radar.
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It had been made quite clear by the rather less smooth new BoE governor that negative rates were not likely but it seems at least one on the MPC disagrees as Broadbent suggested otherwise. This sent Sstg higher and yields dragged GBP lower with them. It is “quite possible” that the Bank of England will introduce negative interest rates in the near future, the central bank’s Deputy Governor for Monetary Policy Ben Broadbent said on Tuesday. However, he added that both the positive and negative effects of negative interest rates need to be taken into account before such a move is made. Speaking to CNBC, Broadbent stressed that the MPC will do whatever is needed to protect the economy from downside risks. The BOE governor Baily (dull) had suggested that the BoE was not out of ammunition earlier but the market was under the impression that did not include negative rates. UK retail sales have collapsed overnight but shocking data is the norm now and we had more released earlier today. But a warning was sent out yesterday that all this relief spending issued by the chancellor, is going to have to be recovered and talk of tax cuts and public pay freezes are starting to do the rounds in Westminster. Good luck with that amidst mass unemployment and a recession. Governments around the world are facing a similar problem and all will be looking to roll-over debt but some may struggle!
On the Cable charts, we still have 1.2247 as support but that is looking vulnerable now and a break there could be significant and could be aided by a stronger USD across the board if stocks fall. The low seen last night was 1.2251. My daily chart on Cable is starting to look like we may break lower but of course selling at the base of the range is always dangerous; but we are short above (as per yesterday’s recommendation).
The Bollinger bands suggest this may not blast through but the pattern is developing now below the 20 day ma. A little caution is required as the DXY is still sitting around the 100 level and I think we need to start testing the 100.80 area for a USD breakout. It will be interesting to see what the USD does after the Powell statement today.
The USD got a boost as stocks rolled over after Dr Fauci suggested the speed of the US unlocking was rather high risk and he could very well be right. His fear was that it would “almost turn the clock back rather than going forward.” Trump won’t like this challenge to his view but Trump is no specialist in this subject and there are some concerning signs elsewhere that unlocking is sparking a second hit. Meanwhile on the US data front, U.S. consumer prices declined in April by the most on record as travel and apparel spending collapsed during the coronavirus pandemic, which had little impact as data rarely does these days. Global growth remains in tatters and yet again the IMF has been forced to rethink forecasts. The fund will next month publish downward revisions to its global economic forecasts, reflecting the fact that the virus had spread further and the economic impact had intensified in recent weeks, IMF Head Ms Georgieva said on Tuesday. She is right if not a little late as they always seem to err on the conservative side. The IMF see a greater need for cash handouts in the EM space and I am not at all surprised by that.
As we head into the Powell speech later, the Fed’s preferred measure of inflation is not CPI but Core PCE. On that, PCE depends on jobs and wages as well as working supply chains, neither of which are in good condition. Regarding unemployment, the U6 rate, which is a more reliable indicator of job market health, is at 22.8% currently and rising while the labour market participation rate has dropped to about 60%. These factors do not bode well for growth and earnings for most companies and earnings will matter at some point. The economy is slowing and going to stay slow for some time and therefore the data will at some point matter as it impacts earnings. I guess the Fed will, as equity investors do, look through weak data for now but I think they may have to do more at some point.
As I have said many times before the consumer is a major portion of the US economy and if consumption contracts due to high levels of unemployment, which it will, then economic growth declines. Also, PPI data from the exporters is dropping fast and that deflation will be exported. Having said that, falling consumption clearly impacts imports which then adds more strain on the exporting nations as demand drops off a cliff. Where the consumer goes; so goes the economy and on that basis, things are not looking good; anywhere. The psychological impact on the consumer of risk aversion setting in cannot be understated.
As we have seen so vividly over the last 10 years, as central banks became more active in markets, over short-term periods the stock market often detaches from underlying economic activity as investor psychology latches onto the belief “this time is different.” It rarely is for long and while we have had many “this time it’s different” in my trading life, none ended well. Remember 2000 or 2008; corporate earnings contracted by 54% and 88%, respectively. While the stock market is once again detached from reality, looking at past earnings contractions, suggests it won’t be the case for long.
This chart, courtesy of RIA is one of the best visuals I have seen for a while. This sits with my view but as ever timing this is not easy. Companies are going to cut costs and cut staff; that I am afraid, is a fact. The impact of this psychological hit to the consumer, even if they have a job will be real, deep and meaningful in my view. For the mass of unemployed there is a huge difference between the willingness to spend and the ability to spend. I can’t see how we pop back to where we were; we never do and this crisis has been faster and harder hitting than most. I think we need to ask a question; would you buy stocks here and now? This gap between euphoria and reality has, in the past, surprised and may yet do again but sounding the all clear here with so many unknowns is naïve to say the least; not for me thanks and I still think we could see a nasty 20% fall from the recent high set the other day here, as indeed I suggested we might yesterday.
Stocks fell into the close last night on Wall St and I think investors are getting concerned that until a vaccine is found, the danger is we continue to have shocks and any economic recovery hopes start to disappear. At the same time, US/China tensions are back as Trump looks to deflect blame and we are all very aware what impact bringing the trade war back into focus can do. One of the reasons I have been short AUDJPY is that China is coming back onto Trump’s radar and thus, it should be on ours. (This is a 4hr chart and shows a few failures below 70.20 where my stop is.)
This deflection of blame is a dangerous one for risk at this time. Trump has ordered the main federal government pension fund not to invest its portfolio in Chinese companies, which his administration says pose a serious national security risk to the US.
Apparently, Graham and other republican senators are looking to introduce a bill that includes sanctions against China! That won’t go down well with equities, AUD or the Chinese administration. Trump is playing a dangerous game here as stocks could take all this very badly indeed and they may not hear all they hope for from Powell today either. Fed speakers were out in force with very dovish commentary but all seemed to be pushing back against any idea of using negative rates. But NZ, the UK and many others seem to be discussing negative rates quite seriously but again, where has it got the Eu or Japan? The trouble is that all the relief the governments are giving cannot last much longer so, I guess the central banks will fallow the BoJ and just keep doing more, whether it works or not and I am rather fearful of just where that takes us all. As Soros said: Only one thing is certain about the post-pandemic world: there is no way back to the globalized economy that preceded it. Everything else is up for grabs, including the rise of China, the fate of the United States, and the survival of the European Union.
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Strategy:
Macro:.
Short AUDJPY @ 69.25 added at 68.25 and Stop at 70.25 recent high.
Short GBPUSD @ 1.2335.. Add at 1.2415 Stop above 1. 2500
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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