Good morning.. Asian markets were weaker overnight but we have seen a considerable bounce early this morning in US equity futures and this has tipped the USD lower. The USD now clearly inversely correlated to risk on or risk off. This means an uncertain and choppy few weeks ahead and getting married to a USD view could be expensive. The Fed has done a lot to quell the appetite for USDs and will continue to do so but EDs are nudging higher again which may keep the USD offered; it may even be helping stocks. This Fed action in funding takes a USD support out for now at least and strengthens the USD lower meme. For me, I think the crosses are easier and I still see EUR weakness ahead. The Union was tested in a crisis and failed to unite. Weekly Jobless Claims today looking like another shocker. But my point is that it DOES matter. How can it not and companies will be cutting costs like crazy after this lock down and so many will remain out of work. That impacts everything in the economy. At present, stocks are adjusting to technical moves by the CBs but the CBs cannot employ 30mln people. At some point, equity investors may realise that.

Keep the Faith.

Data.. All Times BST

10:00.. EU Industrial Production Feb mom Cons: -0.1% Prev: 2.3%

EU Industrial Production Feb yoy Cons: -1.9% Prev -1.9%

13:30.. US Building Permits March Cons: 1.3mln Prev: 1.452mln

US Housing starts mom March Cons: 1.3mln Prev: 1.599mln

US Weekly Jobless Claims Cons: 5.1mln Prev: 6.06mln

US Philly Fed Mfg Index April Cons: -30 Prev: -12.7

Canada Manufacturing Sales Feb Cons: -0.1% Prev: -0.2%

Speakers:..

14:30.. UK BoE Speaker: Tenreyro (Dovish) webcast on Monetary Policy During Pandemics

16:00.. Fed Speaker: Bostic (NV, Neutral) webinar on Fed’s Response to Covid-19 .

19:00.. Fed Speaker: Williams (Dovish) webinar with Economic Club of NY on COVID-19. Text: Yes

20:00.. Fed Speaker: Daly (NV, Neutral) on “3D Servants: the Courage to be Human.’’

Details 16/04/20

Data clearly shows the headwinds facing us. USD mixed here.

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Data across the globe is starting to pick up the enormity of the impact that a global stall in trade brings. I think stocks have somewhat ignored this for a while. Consumer confidence fell hard in Oz and sent the AUD tumbling and US Retail Sales hit home with some impact. Stocks fell sharply on Wednesday, as earnings results and macro data revealed the heavy toll coronavirus was taking on economies across the globe and about time too in my view. The recovery phase will take a lot longer than many expect. We expected bad news from US data but US industrial output fell by the most in more than 70 years in March while there was a record 8.7 per cent drop in retail sales. A gauge of business activity in New York state also plunged to a record low in April and all the components showed a massive shock. I was surprised US equities did not react more negatively to this but I guess we knew it would be bad. Earnings will be key going forwards and there I see little hope.

We may only be at the start of this. Wall Street analysts forecast an 8 per cent decline in S&P 500 profits this year, which would mark the biggest fall since 2009, in the depths of the financial crisis.

Oil fell again and so much for the great deal brokered by Trump as WTI fell below $20. Oil majors including Total, BP and Shell each fell about 5 per cent, while Brent crude was down 7.5 per cent to $27.38 per barrel. But banks were also hit yesterday after poor earnings and a clear fear among banks of credit defaults coming. BTP/bund spreads widened again and it seems to me that it has become clear that in a crisis, EU nations are on their own when it comes to the nitty-gritty of transferring wealth. EURGBP had a bounce but for me there is more to come as the EU Union was tested and failed. The ECB bought more than €20bn of bonds under the PEPP last week, on top of €30bn the week before and here we are with Italian 10yr yields trading close to 2%. The somewhat unprecedented bounce back in stocks – after the fastest collapse on record – has many bulls and bears fighting it out over what we see next. Either “the buying opportunity of a lifetime” or “the end of the beginning of the greatest bear market ever.” To be honest I am not 100% sure with so much manipulation intervention from the Fed and CBs. But it is becoming clearer that the recovery may not be as easy and as fast as some expected. Weekly Jobless Claims today may bring that home again; at some point data will matter as it is a reality if one loses their job and it changes everything for those involved and those around them.

I think the point here is that the damage done to the economy, balanced against what the CBs have done to offset that is an intriguing study. But jobs disappearing this fast has a massive impact on just about everything. Markets rely heavily on sentiment, especially stock markets and that looks pretty shot to me. Confidence is likely to plummet and impact spending and I am not sure that will change anytime soon. If consumers and businesses pull back then the problem for the Fed is that the demand for cheap loans will not be there. Also, the Fed is committed to propping up the credit space but can or should it bail everyone out? To my mind and to a few a lot smarter than I, think the Fed is doing too much in markets and eroding the very structure of capitalism. They are. We may be looking at peak Globalization too and the impact on global growth could be felt for years if indeed the case. A lot of data has been ignored for some reason already but I am not sure I buy into the idea that no matter how bad 2020 gets, it’s irrelevant just because it’s hopefully temporary. That strikes me as being rather naïve. But the Fed has quelled some of the demand for the USD and this may help a lot in the funding space. Right now the USD is governed inversely by risk on or risk off. That means we are in for a choppy few weeks/months.

As of yesterday, the Big 7 US banks – JPM, Citi, BofA, Wells, US Bancorp, Goldman And PNC, have already set aside some $27 billion in credit loss provisions, a number which is 4x greater than the total provisions set aside a year ago, and the most since the financial crisis. Alas, this looks rather conservative to me as the Fed cannot bail out everyone, especially non-banks. And yet investors still want stocks up here. US Industrial Production plunged 5.4% mom (considerably worse than the 4.0% drop expected and the worst mom since Jan 1946) and still it doesn’t grab the attention of investors.

This is what a depression looks like. The chart below is the Empire manufacturing data.

But I hear you scream; of course it is bad as the global economy stopped. Exactly but how can we honestly say that we just turn around and recover in a month or so? Will 17mil workers suddenly be re-employed in a month as businesses try and recover while keeping costs to a minimum? These are the realities which challenge the CB actions over time.

Again it is all about how long the upcoming recession will last. While the duration of the coming recession remains unclear and is a function of how quickly the coronavirus vaccine is developed, it is more than likely that total loan losses will match, if not surpass what happened in 2008, especially since this time the crisis is global and not just US based. The loan provisions set aside by the banks seem rather small. Bank executives were questioned on these provisions and there is a reason why banks did not want to discuss what their future provisions would and could be – because they know very well that if the financial crisis is a template, there is a long way to go before banks are properly provisioned. The point here is that if loan provisions are forced to rise then profitability will collapse and the flat yield curve is not helping. With 17mln losing their jobs (and possibly another 5-6mln this week), the knock-on effect on every part of the economy will be a lasting one.

The global economy or any economy is an organic living thing like your garden. If you stop working on it, parts of it die or become infested with weeds and it takes a lot of time to recover it. There are so many things, decisions, actions and developments not happening right now. In normal times, new businesses are formed, and new consumers grow up and take jobs. Governments enact laws, partly to collect taxes, and partly to ensure fair treatment of all. Consumers decide which products to buy based on a combination of factors, including their level of wages, the prices being charged for the available goods, the availability of debt, and the interest rate on that debt but also based on confidence and a feeling of wellbeing. It is not being tended to and it will take a lot of time and effort to get back into shape. We may grow differently now with a new world order as, if you are like me, it seems that there is a new belief and respect for those who have worked and helped us through this.

Is it right that Bezos makes 24billion in a time when 17mln Americans lose their jobs and health workers earn almost nothing for a 60hour week saving lives? I just wonder if there is a shift in social attitudes coming and we end up with a new normal. Between the continued rise of e-commerce, the lockdown consequences, and the lingering social distancing that could keep millions of people from visiting shops/stores, physical retail is in pretty serious trouble. Travel also as I am not keen to jump on a plane yet. Maybe it’s about time for a new normal where large corporations are taxed correctly now to support our national health systems and pay them properly. Big tech firms flout tax rules and it is time to end this nonsense. Rant over.

To sum up; I think change is afoot and it may touch all of us. As soon as the shutdowns end, it will be obvious that the world economy is in worse condition than it was before the shutdown. The longer the shutdowns last, the worse shape the world economy will be in. Thus, when businesses are restarted, we can expect even more protests and more divisive or protectionist politics. Some governments may be overthrown, or they may collapse without being pushed but a new, more socialist structure may be born. Globalization may be on its way out and that has massive implications for the global economy and will touch us all. The Fed and other central banks suggest that new measure are temporary but in 10 years they have not managed to reverse anything and times, in many cases were pretty good compared to what we are looking at now. Just how will they take all this back if 80% of the equity rally is on the back of CB actions. Where is the next big growth area? China, S. Korea, Japan? I think not and the EU looks like a basket case and still faces existential issues ahead while America turns its back on the world. Again the EU union was tested in a time of crisis and failed to come together and that taught those on the periphery a lot about their future within it. It reminds me of Orwell’s “Animal Farm” and the pigs are now standing up and giving orders.

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Strategy:

Macro:.

Short EURGBP @ 8901.. Stop @ entry now (took substantial profits at.8760)

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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