Good morning.. Asian markets and US futures rally on the Gilead news and Boeing restarting a Seattle factory but a vaccine is still some way off and US governors may start unlocking as the virus hits its peak. A high risk strategy if ever there was one but again, equity investors happy to look through all the negatives. But central bankers are not and it seems bond investors remain wary too and shouldn’t the USD be lower after all the Fed has done? 10yrs of jobs growth in the US wiped out in 4 weeks!!! How is that not an issue even if you were expecting it to be bad. Again it is the knock-on effect of this and I do not see the consumer recovering from this for quite some time and most economies are now services driven. This all leaves the USD direction rather uncertain so I am still focusing on crosses and EUR crosses in particular. EURGBP has slowed its decent but I still see it lower and a test towards .8500 is still on the cards. Not much data of note today as EU CPI is a final look.. But stocks look high running into this weekend but they seem rather bullet proof for now but I think a lot of longs are rather speculative accounts. Plus it’s a Friday so, Be careful out there”..

Keep the Faith..

Data.. All Times BST

10:00.. Eur CPI y/y (Final) March Cons: 0.7% Prev: 0.7%

Eur CPI mom (Final) March Cons: 0.5% Prev: 0.2%

Eur CPI Core y/y (Final) March Cons: 1.0% Prev: 1.0%

Eur CPI Core mom (Final) March Cons: 1.1% Prev 1.1%

15:00.. US Leading Index Cons: -7.1 Prev: 0.1

Speakers:..

14:00.. ECB Speaker: Rehn (Very Dovish) on Webinar “The World Economy Transformed”

Details 17/04/20

Stocks continue to focus on the positive but bonds and the USD suggest otherwise. Fed actions need scrutiny:

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Equity investors believe that unlocking economies is the key to recovery and to some extent, getting people back to work is a positive but of course the danger is that this allows a second wave to strike and governments are forced to reverse their unlocking decision. If that happens, I think confidence will take a huge knock but most governments are taking a cautious look at reopening. A staggered open looks the right way to go but Trump seems to be back-tracking on forcing an unlock but is leaving it up to local Governor’s to decide. “My administration is issuing new federal guidelines that will allow governors to take a phased and deliberate approach to reopening their individual states,” he said. That may be a dangerous move and may lack a cautious approach in some states where there have been calls to reopen as soon as possible. Governors are going to have to hope that infections do not spiral out of control and spread across the whole of the country. As Trump spoke it was announced that the number of cases in the US rose to almost 668,000 and the death toll approached 33,000 people — easily the highest in the world. Again it seems that Fauci is being ignored for political gain. There are big risks with this strategy but as is the case with shocking data recently, investors seem prepared to look through all this and Asian markets and US futures rallied strongly overnight after shocking US Jobless claims and weak data from China.

The US has wiped out 10 years of jobs growth in 4 weeks and I am sorry but I do not see how that cannot matter. Yes, I get the fact that another 5mln hitting the unemployment numbers was expected but the damage here will be felt for a very long time. Businesses are suffering extreme pain and many will continue to try and cut costs as the economy reopens and I fail to see that 22mln workers will suddenly be re-hired. I still think that investors are blinkered to the damage that comes from the fall-out of this and corporate defaults are on the way. It may take a while for the economies who saw the virus hit first to recover and not that anyone cares but China’s GDP in the first quarter plunged 6.8 per cent year on year, the National Bureau of Statistics said on Friday.

This after more than 40 years of uninterrupted growth dating back to the late 1970s. This data comes after the IMF expected to see the worst economic outlook since the ‘30s. Fixed asset investment in the first quarter fell 16 per cent compared to last year, while total retail sales of consumer goods fell by 16 per cent in March. Nothing to see here; move on. This is an economy massively supported by government spending and liquidity pumping from the PBOC. The US and most others are still way behind China and so global growth will continue to collapse and that means the global machine may struggle to repair itself.

Stocks also got a boost from some promising news on the vaccine front as a Gilead coronavirus drug had shown positive results in a clinical trial, giving investors hope that a treatment could ease the pandemic and open up the global economy. This is indeed good news and I do hope this can be delivered to where it is needed in good time and in the quantities required but it is very early days for that thought. The tests were reportedly showing rapid recoveries in almost all of the over a hundred severely ill patients. Gilead shares jumped 14% on this last night and with Boeing rallying strongly on reports of resuming commercial plane production at a plant near Seattle next week. Technically, stocks still look pretty convincing as the aggressive bounce off the lows does signal a base may be in but up here they look pricy to me. Bonds and the USD do not seem to be as optimistic as equity investors as both still suggest some stress out there. The USD should be lower after all the Fed has done and it isn’t; and bonds still have flat curves although US yields are a tad higher today. US 10yr is still only 0.66%.

The Bloomberg USD Index has a less heavy weighting of EUR in it. The USD should be lower than this; why isn’t it?

With all the euphoria in stocks, listen and see what central bankers are saying and indeed doing; they are clearly still very concerned and even Powell may not have done enough but the market clearly believes the worst is not behind us and that policies have covered the risk. Every single central bank is now actively injecting billions of liquidity into the stock market.

The idea that all the risks are now covered seems unlikely to me and the Fed would not have done all this if they thought this was going to pass in a month or so. This cannot and is not going to last. At the peak in late March, the Fed was buying $75bn in Treasuries every day, and we are now down to “only” $30bn per day. These enormous Fed purchases combined with rates moving sideways in recent weeks make you wonder where 10-year rates would have been if the Fed had not intervened. As the Fed gradually steps away over the coming weeks, and Treasury issuance continues to increase to finance the fiscal stimulus, the market will be focusing more and more on demand and supply in the US Treasury market. That is why bonds remain nervous.

The focus must stay on the consumer going forwards too. As Bloomberg commented: “the March numbers from China probably tell us a bit about human psychology as well as economics — you can turn factories back on and rev up production lines, but it’s tougher to restore consumer confidence that’s been so badly shaken”. This chimes with my recent views on this subject. The damage done to the consumer is going to take a long time to heal and in economies so reliant on services and consumer spending and confidence, I am not sure at all that things get back quickly to where they were by some margin and it is worth noting that a vaccine for this is still some way off. With the USD giving rather mixed signals here and not giving any clear direction signals, I am still preferring trading crosses and I think EUR crosses will remain offered. The deepening divisions among European nations over their response to the coronavirus pandemic has highlighted the inability of the European Union to provide strong and effective leadership in times of crisis.

Macron has stepped up to the limelight (as he loves doing) suggesting the EU is facing the “unthinkable” and he is right. Faced with arguably the greatest challenge Europe has faced since the end of the Second World War, the EU’s failure to help coordinate the actions of the 27-nation bloc in tackling Covid-19 has once again brought the organisation’s institutional failings into sharp focus. It is becoming evident to many that the EU programme is for the good of the few; not the many and that is NOT a Union. Macron warned of the collapse of the EU as a “political project” unless it supports stricken economies such as Italy and helps them recover from the coronavirus pandemic. Strong words directed at Germany and the Netherlands but shows the political shift within the EU. France was once one of the main voices of unity within the EU. The political shifts in Italy, Spain and others will be key.

He said; there was “no choice” but to set up a fund that “could issue common debt with a common guarantee” to finance member states according to their needs rather than the size of their economies. Good luck with that M. Macron. There is no way Germany, or the Netherlands will allow a wealth transfer system unless possibly the EU is about to fragment and that just depends on what Italy, Spain and a few others now decide to do. But I am pretty sure politics are going to change and a less EU friendly set of governments may arise or current ones will pick up the winds of political change and listen to the voters requests of a tougher stance against the EU’s wealthy nations. They all have one trump card which they can play and play it they should. I think this will continue to keep pressure on the EUR. All the evidence still suggests that the majority of European governments are ignoring the EU’s advice and acting unilaterally to tackle the impact of the pandemic on their citizens. This union has some severe cracks in it.

Meanwhile, Fed actions are starting to become the focus as some interesting signals are coming since all the big headlines of support for markets. Since the Fed announced its market bailouts and interventions on March 15, it has printed and handed to Wall Street $2.06 trillion (helicopter money for Wall St and hence the rally). But here is the thing: This was front-loaded, and over the past two weeks, it has cut its bailouts in half, and it has stopped lending new funds to its SPVs that were expected to buy all manner of securities, including equities, junk bonds, and old bicycles (like the ECB do). But those loan amounts haven’t moved in four weeks. What it has bought were Treasury securities and mortgage-backed securities – and it’s cutting back on those too, as suggested above. The Fed added $154 billion in Treasury securities during the week, down 47% from the $293 billion it had added the week before, and down 57% from the $362 billion it had added two week ago. Hmm. The sharp reduction in purchases of Treasuries confirms for now that the Fed is sticking to its announcement that it would drastically cut QE after the initial blast.

The Fed has “dollar liquidity swap lines” with the ECB, the Bank of Japan, and the central banks of Canada, England, Australia, New Zealand, Norway, Sweden, Switzerland, Denmark, Singapore, South Korea, Brazil, and Mexico. The total on its balance sheet increased by $20 billion from the prior week to $378 billion but has been in the same range all April. The ECB and the Bank of Japan – the biggest users of the swaps – preside over export-focused economies that both have large trade surpluses with the US and through those surpluses obtain a constant flow of dollars. In addition, their currencies are the second and third largest global reserve currencies (dollar’s share down to 61.8%; euro’s share at 20.1%; yen’s share at 5.6%). Further, the BOJ’s foreign exchange reserves include $1.2 trillion in US Treasury securities. In other words, neither the ECB nor the BOJ need the dollars for trade. They need them to support their banks and companies have large dollar-denominated debts and speculative bets that they need to refinance with cheap dollars and those swaps make that possible. But the banks are clearly stressing. Is this why the USD is not lower? Just a final word here. If the Fed had sent that $2.06 Trillion to the 130 million households in the US, each household would have received $15,800. But forget it, this was helicopter money for Wall Street and for asset holders – particular those with the riskiest bets – and for no one else.

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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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