Good morning.. Mixed moves in Asian markets with the Nikkei and Shanghai following the Wall St falls while HK and Kopsi were higher and Chinese stocks failed to react to reassuring noises on the Chinese equity fall from State media. Netflix slumped 10% after hours as it appears that the virus has pulled forward subscribers and there may be a void coming next quarter. NASDAQ has been underperforming all week and to my mind, US stocks look like they are tiring at the top of the range. Today we see the start of the EU summit on the bail-out programme and the “Joint bond” issue and they have an historic opportunity to secure the future of the EU and the EUR. Negotiations will be tough and a decision may not come at this meeting which may disappoint the s/t bulls in EUR but why wait. An agreement this week would show solidarity and commitment (something that has been lacking) to this union and mark a point in the history of the EU. Get on with it! Maybe some rebalancing between loans and grants can work but they must not allow the Netherlands or anyone else a veto on distributing the aid. EU CPI today along with US housing and Michigan confidence data on the ticket but barring headlines, a quiet one expected. Keep an eye on the NASDAQ today and as ever, it is a Friday, so “Be careful out there”..
Keep the Faith..
Details 17/07/20
US bank earnings may be the bright light this quarter:
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Earnings season in the US is getting into full swing but I do wonder if the bright start by most of the big banks, who were gifted an opportunity to front run the Fed, is one of the few bright spots in what may turn out to be a dreadful season. S&P is trading near the highs of the range I have been looking at between 2910 and 3250ish and I think they are starting to look tired again. NASDAQ has been underperforming for most of this week and Netflix fell hard after the close after its outlook disappointed. While they added substantial subscribers in Q2 the company cautioned investors that subscriber growth would slow in the second half of the year, after enjoying the bump from lockdown life in recent months. Netflix expects to only add 2.5m new subscribers in the July to September quarter, which would be its weakest showing in years. Are the “stay at home” beneficiaries in the tech space starting to roll over? With the concentration of this group so impactful, we certainly need to keep an eye on them. Shares in Netflix slumped 10% after hours but after a 58% rally this year, investors are hardly panicking yet; but it will be interesting to see how these and the NASDAQ close this week.
The virus has brought TV and film production to a halt, a situation that may only get more dire for Netflix as the months wear on. But the biggest question remains how many future subscriptions has Covid brought to the present?
Chinese markets were interesting as Chinese stocks lost further ground on Friday even as state media sought to reassure investors on the outlook for onshore equities following their worst fall in five months. At the time of writing, Shanghai is down 0.8%. In the US, the US Treasury’s report on International capital flows shows that May saw record buying in US Stocks by foreigners while they sold the “less risky” US Treasuries.
I thought the chart above was interesting. Central banks are clearly keen to hold gold again and investors also seem to want gold now as part of a diversified portfolio but I am not sure there is enough to go round if real money asset managers start to do that. But maybe gold is seen something of a hedge against this euphoric equity rally which to my mind may be ending. But be careful with that as we have seen gold dump when equities really take a hit. Maybe some see it as an inflation hedge but again it is something of a blunt tool for that.
US retail sales were surprisingly better than I expected as there were concerns that consumers, especially those unemployed and receiving state aid, were either saving or paying down debt. On a yoy basis, both the headline and GDP-driver Control Group are back into positive territory.
But a new study released Thursday, suggested that Americans who received enhanced unemployment benefits spent roughly 10% more than when they were working, according to Reuters. This of course makes sense, as some 63% of jobless workers are making more on unemployment than when they were working. This scheme is seriously flawed and more importantly is about to run out. It is madness to take away the incentive to get back to work but they need to come up a with a new plan and deliver it by the end of this month and I see little to suggest that this process is about to be delivered. I find it hard to understand how equity investors can ignore the threat of a longer and deeply damaging period of unemployment in the US. Researchers analysed transactions for 61,000 households that received unemployment benefits between March and May and spending dropped for all households as the virus spread and led to business shutdowns, but then rose when households began receiving jobless benefits, the study found.
According to the Century Foundation, if the supplemental payment isn’t extended through the end of the year, the poverty rate will jump from 12.3% to 16.3%! The government will change this disincentive but the real concern is how few may actually have a job to go back to. All I read is companies cutting costs and shedding jobs and CapEx is not going anywhere but down for some time. This round of cost cutting has only just begun but we can see from the airlines just how deeply damaged many companies are both big and small. It is the small and medium sized companies that concern me most and we have no idea how many will go bust or default on loans. The banks are clearly still petrified by what is coming as loan loss provisions continue to grow. Meanwhile, Democrats are pushing to extend the $600 weekly payment as more than 30 million Americans are estimated to be receiving unemployment benefits but the structure of these loans need to encourage people back to work. What is very concerning in all this is that research suggests that jobs are difficult to come by. As of July 10, job postings were around 23% lower than the same period in 2019.
What I did find strange is that due to low mortgage rates, homebuilder confidence rocketed higher yesterday but how can housing survive when unemployment is set to remain high for many months?
Initial jobless claims caught my attention and you simply have to ignore seasonally adjusted data on this as it is bonkers that they apply seasonal impacts on this. It makes no sense at all. Over the past five weeks, these initial state unemployment claims totalled 7.25 million, for an average of 1.45 million per week, which shows how relentlessly companies have shed workers week after week. Early on in the crisis, it became clear that the seasonal adjustments were not designed for this huge explosion in unemployment and caused the “seasonally adjusted” initial claims to be over-reported by the millions. The reality is below.
This week, the number of the insured unemployed rose to 17.4 million, the first weekly increase since mid-May (the blue columns in the first chart above). The BLS is losing credibility fast. The BLS, which reports the monthly jobs numbers on the first Friday each month, is working off surveys of households and employers, rather than actual unemployment claims. It has acknowledged a number of systematic errors in its system – including confusion over how to answer basic questions – so that its conclusions about jobs and employment have become useless. Exactly how many people are still out of a job or out of work remains a finger in the air test. But with 32 million people still receiving unemployment compensation under state and federal programs, the second highest number ever, after last week’s record, shows that the situation remains catastrophic and probably will do for some considerable time.
Today, we see the start of the EU summit on the bail-out programme and I have a message for them. This is the time to secure the future of the EU and underpin the EUR as a serious alternative to the USD for years to come. I fully understand some of the opposition to grants for weaker countries that have squandered spending in the past but this is your time; NOW. I think there are some concerns that this meeting, which runs into the weekend, may not provide a solution as Rutte and a few others seem determined to get it watered down. The issue may just be the balance between loans and grants but they must NOT allow veto’s on spending. Surely the dissenters can see the positives for the broader goals of the EU and come to an agreement. The problem is, that if they fail to agree this week, then we have to wait until after the summer as NOTHING gets in the way of their holidays! I find that incredible. With the markets pushing the EUR higher into this meeting, there is a chance that we see some profit taking and if the decision is pushed into the autumn, then we may see the EUR fall back but I do think, at some point, this will get done in some form and so any dip may be a gift. The nature of the beast suggests we may have to wait but I am sure Merkel and Macron will be pressing hard about the responsibility of the group leaders to ensure the future of the programme that will eventually benefit them all. Maybe, just maybe, they can agree on that and sign an historic agreement and hopefully this week and show solidarity for once.
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Strategy:
Macro:.
Long EUR @ 1.1210.. Stop at 1.1150
Long EURAUD @ 1.6250 stop at 1.6080
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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