Good morning.. That was a big day yesterday as we had the double hit of the Moderna drug story and the Franco/German agreement on some form of Euro-bond. But both demand some examination even if the markets did take both at face value. I saw nothing from the Netherlands on this supposed united front and all 27 have to vote for this and Austria still say no to grants. On the drug issue, a tiny specimen has been used to test this and we need to see a far more thorough testing process completed. But I am not one to stand in front of euphoric markets and some real damage was done to a lot of popular FX and bond positions from G10 to the deepest corners of the EM space. I was stopped out of the AUDJPY position and brought a profit stop (which was hit as I typed) in Cable at 1.2245. I am looking to e-sell this in time but want to recalibrate. But what does worry me is the growing spat between China and its trading partners and there has been an escalation with Australia. This, coupled with this drive by Trump to push back globalisation has prompted me to suggest shorting AUD up here at .6550 . To my mind the risks are still out there but few wish to look right now.

Keep the Faith.

Details 19/05/20

Quite a day yesterday and potentially some game changers: The Four Horseman of the Apocalypse.

–

Right from the outset I have to say that I was very surprised that France and Germany stepped up to the plate and suggested some form of Euro-bond. That was a game changer for the EUR which very obviously rallied on the news. Of course there are the usual caveats with anything like this from the EU and forgive me for sounding like a cynic but the EU usually goes for a big headline and then takes forever to deliver in some diluted form of fudge and argue forever over it later; but hope springs eternal that Germany at least is looking to help the weaker parts of the EU for the greater good. (Where are the Netherlands in all this?). But the Austrians are the first to suggest that the EU’s new virus relief measures be loans not grants (contrary to what Merkel/Macron were saying). National governments will have to approve the measures and it highlights that there could yet be some hurdles ahead but for now it is clearly a positive step and the EUR squeezed the many shorts.

Daily chart above but as you can see a mixed bag at present but BTPs soared and Bunds fell, narrowing the spread considerably on the back of this but to be honest, the FX move was, if anything, rather muted and the DXY is still in a well-established range.

“The EU must act together, the nation state has no chance if it acts on its own,” said Merkel, indicating that further work to bolster the bloc is still needed. She is right of course but still some refuse to stand with her. “This is the short response to the crisis, about the long one we will have to discuss” Merkel said. Well, just one thing here and that is all 27 have to agree to this. I wonder just how long this process will take and what it will look like at the end of the process. But it is a start and for that I applaud Merkel who yet again seems to be the only adult in the room and I think the EU is going to miss this lady. She is the voice of reason on so many issues. But what is staggering is the fact that the vast differences in resources was brought into focus after the EU said that Germany accounts for more than half of state aid approved to counter the pandemic’s economic fallout. But get this, the Netherlands got €650 in aid for flower, potato and vegetable producers but the weaker nations are still screaming for help. This system is either broken or corrupt. I think this sums up where we are right now; from Merkel herself “We are making [our partners] a proposal — I think it will help to reach consensus in the EU27,” she said. “But we can’t force anyone [to accept it].” Hmmm indeed.

This all happened within a weak USD move, based on a surge in equities as investors grasped on to the hope that Moderna had the answer to a lot of the vaccine questions but like the EU bond deal, a lot still needs to be seen to be done. Forgive me for sounding like a bitter and twisted old cynic but as a good friend of mine suggested this morning, 8 people were given small doses with some positive signs which lead to a 20% rise on the stock and 800 points on the Dow! Don’t get me wrong as I do wish it were the cure as much as the next man but there is no rational perspective out there at the moment. Stocks soared from the EU open with DAX outperforming and never looked back on this and it turned a lot of popular positions with big moves in the EM currency space as well, as risk aversion trades took a hit and gold got hit hard after a very strong rally early on; making a high of $1765 and a low on the day of $1728. I got taken out of the AUDJPY short in all this finally at 70.20 and will be bringing my profit stop down in Cable to 1.2245 (Hit as I write) just above recent highs; 4hour Cable chart below.

In the equity space, there was a “dash for trash” as all recently beaten up sectors rebounded like it was the end of the War; a real sense of euphoria over this new drug. I also think investors have grasped upon Powell talk that the Fed can do unlimited support in the liquidity space and there is a chance they will have to reverse recent tapering of US bond purchases due to the amount of issuance (supply) on its way.

The session had a bit of everything and for now, investors are prepared to ignore the growing tension between China and a growing number of other nations over and above the US regarding China’s handling of the virus and China is losing friends on this. In the liquidity space, I guess we have a few questions to ask as the Fed suggests that they have unlimited buying capacity; firstly, do we have a low in stocks, a low in Oil and a high now in the USD? These are big questions as markets still price negative interest rates in many major economies; including the US and the UK if we look to 2021. But again, while the Fed can and probably will do whatever it takes to provide liquidity, it cannot prevent a solvency issue. We have to ask ourselves just how bad the economies around the world have been hit. Can they really recover quickly? That question still remains unanswered.

We still have before us the “Four Horseman of the Apocalypse”; the pandemic, the economic contraction, the oil price collapse and the Fed/government response. I realise the power of the equity markets bounce but any free-thinking individual must recognise that things have been hit hard and that risks must remain. We have no precedent for a self-induced coma on the global scale we have seen the global economy thrust into, so economic models are useless and looking at patterns in 2008 or 2000 are pointless. Will the recovery be V-shaped, or a U, W or L? and which of the crises will you choose to look back on for guidance; does this one resemble any others? Nope is the answer to that; at least in my lifetime. Maybe the Fed stimulus can cure all ills but I doubt it and what will that massive boost bring us in the future and can they ever reverse out of this? Will government be able to pull back on spending and stay elected? Big questions still to be answered. Mind you I am not standing in front of this euphoria yet.

Can the markets ignore a rage from the WH and possibly more action against China all the way into the election in November and what will China do to try and make sure he is not re-elected? To be honest I am rather bereft of answers for you as this is a new paradigm we are living through and at the same time, the US is dismantling globalisation while the central banks are dismantling capitalism. How can that NOT mean change is afoot which in itself breeds uncertainty and we may even be on the brink of some kind of cold war with China and some western nations led by the US. Australia threatened to appeal against Beijing’s decision to slap punitive tariffs on barley exports to the World Trade Organization but has denied it is in a “trade war” with its largest trade partner. Maybe not yet but this is certainly how they start and we may have just heard the first shots. China is also threatening Aussie wine and other imports as this game evolves; Back off or else! Oz cannot afford this fight.

As I have said before, Australia mortgaged its future with China and cannot afford a trade war and China know that and is clearly flexing its economic muscles here. Australia’s trade minister said on Tuesday he was “deeply disappointed” by Beijing’s decision to impose duties of up to 80 per cent on barley produced in Australia for up to five years — a move farmers said could cripple an A$2bn ($1.3bn) a year industry. The move came less than a week after China suspended imports of red meat from four Australian abattoirs, a decision analysts have linked to Canberra’s role in leading calls for an independent inquiry into the origins of the coronavirus pandemic. I really do still have deep concerns regarding global growth and on that basis I am recommending selling AUD up here (.6550) in front of a couple of highs set at .6555-68. Setting a stop is not easy on the techs as there really is not much on the charts until .6680ish.

We may just be in a time-warp or void until the money runs out at companies that will soon file for bankruptcy and not just the corner shop but some serious corporations that have been badly run for years. How can all those Unicorn companies survive when they run at a loss in the good times? The debt threat is still real for many.

Zombie firms should be allowed to fail; that’s how capitalism works. I am not sure at all the Fed has the tools to stop a run of defaults coming and there could yet be some agonising times ahead for many. I agree the Fed can do as much as they want as far as printing money goes and that money does seem to find its way into equities but can the Fed, with policies seemingly following Japan, come out with better results than they have?

The Fed needs to be wary of buying everything and totally socialising markets as that is an end game and one they will not want to be trapped in. So, what happens when the funding stops? How long can the US government keep spending and if they do keep spending then how big will the Fed balance sheet need to be; 10, 15 maybe 20trln? Does that sound like policy for a short sharp recession?

For the Fed and indeed other central banks, it is important in understanding the type of recessionary cycle you are fighting, so that the Government and central bank applies the correct monetary and fiscal response. As with any illness, the application of the wrong medication can lead to unintended consequences and can kill the patient. There is a real possibility the Fed is ‘filling in a hole’ that is growing faster than they can fill it. (The Fed is injecting $6 Trillion via the balance sheet expansion versus a potential $10 Trillion shortfall looking at estimated GDP.)

I guess we will hear more on QE programmes soon but regardless of the eventual outcome, there is one consequence of massive debt and deficit expansions that will not change – slower economic growth. Go talk to the BoJ about that and this de-globalisation will add to the problems. We have seen different kinds of recessions before and not all are the same by any means and thus the cure is different for each. Event recessions are indeed usually quicker to heal (like earthquakes and natural disasters). Now, there are growing expectations that the virus-induced economic shutdown and the subsequent recessionary backlash will be very short-lived. The assumption is that if the economy reopens, the activity will resume (good luck with that) and the economy will quickly regain its footing. If such an outcome is indeed the case, there is a very real danger that the Fed applied the wrong “medication” (too much) to cure the economic patient. Maybe; but the Fed and indeed other central banks do NOT see a quick recovery it seems. Either the global central banks are wrong and over-boosting the economy (with all sorts of nasty side effects) or the equity investors are. Something will have to break. Tick tock.

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

Strategy:

Macro:.

Short AUDJPY Stopped at 70.25

Short GBPUSD @ 1.2335.. Profit stop done at 1.2245. looking to re-sell.

Short AUD @ .6550 today.. Stop @ .6685.

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.