Good Morning.. Markets were quiet in Asia with Japan closed and it seems the US markets were happy to ignore the growing political tensions between the US and China and I think that is a big mistake. We seem to be shifting to a more bi-polar world and the consequences and impact on global growth, earnings and world stability are a huge concern to me. In FX markets, I still see dips in EUR and some of its crosses attracting and I still think we will see more “real money” accounts buying into the EU, its bond markets and thus, the EUR. At the same time, the clock is running down for the UK to secure some trade deals with both the EU and the US; the latter delayed until after the election. EURGBP stalled just under .9139 resistance but I think we shall see that taken out soon. Strong PMI data from Oz helped the AUD and this remains a popular buy on dips for now. Generally, I can see the USD moving lower still. But stocks worry me and it seems insider executives are now selling their own shares! They may know a lot more than we do about how things really are but at present the market is dominated by retail investors buying. I know who I would back. Weekly Jobless claims today.

Keep the Faith.

Details 23/07/20

US equity markets ignore the ramp up in US/China tensions:

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While we saw some reaction pre the US open to the fact that the US were forcing China to close their consulate in Houston, investors in US equities reversed early losses and ignore the fact that it is now becoming clear that the aggressive China hawks are in charge in the WH. This is a worrying escalation and it is not without consequence for financial markets as I am sure we shall see some form of retaliation (China force the US to close the Consulate in Baku) and on a macro basis, we have just started shifting to a bi-polar world with China and the US on opposite sides and those in the middle forced to make potentially damaging choices on who to side with. This means we take further steps away from the globalised world which we know and have thrived in. Again, thinking on a macro scale, this could usher in higher prices as businesses lose their cheap labour; but it also increases the danger of a riskier world on the geopolitical front. Some nations have extremely strong trade ties to China and the likes of Australia are going to have to ask themselves what damage will be done to that by backing the US. Strong PMI’s though from Oz.

This story does not seem to be going away and in fact we have just seen the first shots in what could be, a long and damaging trade war. This phase will be far more damaging to global trade and thus, global growth and that impacts stocks at some point. As Bloomberg suggested this morning; Eager to blame China for the Covid-19 pandemic and fed up with what U.S. officials call a history of espionage and intellectual-property theft, Trump has allowed a small group of advisers led by Secretary of State Michael Pompeo to push U.S. policy toward its most antagonistic in decades. The result is a series of sanctions, restrictions and condemnations that culminated in the Houston decision. I guess US investors are focused solely on the virus and a potential vaccine but this could be just as damaging and possibly last a lot longer as even if Biden wins the next election, both parties seem to be “singing from the same song sheet” on China. The fact that the US is leaning hard on its allies to make tough choices is a real concern for global unity and trade.

China’s advancement in technology and its position on the global stage has unnerved the US administration and they seem very prepared now to block this advancement. According to one person familiar with internal discussions, Pompeo and his advisers have come to conclude that a capitalist, democratic U.S. and a Communist, unelected leadership in China are fundamentally at odds and cannot coexist! That is rather chilling and just how far is the US administration prepared to go with companies that deal with and rely on the huge market in China? I am amazed that forward looking markets are not more concerned by this threat to global stability and the global economy. Maybe people think this is Trump electioneering as polls have suggested that a tough stance on China is popular but he is playing a very dangerous game here if that is the case and the danger here is that it raises the profile of the section in China’s administration who may be against reform. If they know anything of Chinese culture, then they will know that China will not respond positively by being threatened; talks are needed.

Meanwhile we saw the USD make another recent low and EURGBP rallied to just under chart resistance at .9139. A break here will quickly target key resistance at .9175 in my view and I would be a buyer on dips still if not already long.

We are just seeing the start of a potential trend higher in my view (EURGBP daily above) as the bands just start to widen and the MACD is crossing. It is not confirmed yet on the techs but I think the fundamentals on this trade are still strongly suggesting more gains. The EUR leg has seen a significant gain and profit taking is likely but the EU and ECB are now a force to be reckoned with and I still think real money accounts are considering re-weighting into the EU.

Europe’s bonds, currency and stocks could become much bigger features of international portfolios. These decisions take time but from an investment perspective, I am not sure they can ignore this. According to Pictet Asset management (and they should know); Since its inception, the single currency has lived in the shadow of the US dollar. Its failure to mount a challenge to the greenback’s status as a reserve currency has in part reflected the lingering risk of the break-up of the bloc. Greater political and economic stability — and a new breed of pan-European triple A bonds — change that calculus. They should enhance the euro’s appeal among international investors and central banks. By our reckoning, the euro is trading 16 per cent lower against the US dollar than is warranted by fundamentals such as a healthy current account surplus. I agree with that.

Meanwhile in the UK, the government is struggling to see any progress in talks with the EU OR the US. The US has said that London’s digital services tax “unnecessarily complicates the path forward for a US-UK trade deal” and urged the UK to “reconsider this punitive action against its ally”. The US is prepared to flex its big muscles even if we side with them over Huawei it seems. The warning from Congress comes as UK and US negotiators prepare for a third round of trade talks next week, highlighting the increasing transatlantic tensions over the tax and it is now clear there will be no deal before the election. Meanwhile on Brexit, Barnier and Frost are expected to vent their frustration about the lack of progress on Thursday, even though officials from both sides insist the process is not on the verge of breakdown. Frost is expected to make himself available to continue one-to-one talks with Barnier next week but the question remains if a compromise can be found as the differences seem rather unsolvable.

At the same time, the UK must admit it needs a deal as the economy is looking extremely fragile and the outlook is not good as unemployment is likely to stay elevated for longer than many realised. A deal is needed very soon as preparing businesses for a no deal exit and the legal process that a deal may require, suggests time is seriously running out. I am not sure that this government is prepared to take a weak deal that connects us to the EU still. I am not sure that is priced and a weak deal on trade is not a positive. “The writing of the legal text has to start in September” at the latest, said the person briefed on the talks, noting that at this stage core sections of the agreement remain up in the air, rendering even provisional drafting impossible.

Meanwhile, global equities, led by 5 major stocks in the US, continue to defy gravity. But what may be concerning is that it still seems a lot of this rally is driven by the retail investors. Data suggests that nearly 1,000 corporate executives and officers have sold shares in their own companies this month, outpacing insider buyers by a ratio of 5-to-1. To my mind, if executives in companies are selling then I need to ask why? But this retail group has grown in size since the crisis and seem to be in control but that does NOT mean they will be right. But the Fed has got a lot to answer for here and seems determined not to allow stocks to fall far and so the risks seem minimal to many.

I am not sure what the catalyst may be but I do think a flush-out is possible and around the corner. According to Bloomberg, “only twice in the past three decades has the sell-buy ratio been higher than now.” Maybe time to book some profits as it seems those in the know certainly are. The condensation of the top 5 mega-caps is getting to crazy levels.

We have seen the NASDAQ start to underperform but surely if these stocks start to fall, the whole equity complex takes a hit. I realise that at present we are seeing some rotation but I cannot see the Dow and S&P holding up if tech stocks take a significant hit.

Markets need to start pricing in a wave of bankruptcies, defaults and longer term high unemployment in my view. It seems like every day there is another high street shock – a well-known retail brand giving up the struggle. But I guess markets seem to believe that companies can somehow survive all this. In normal markets what makes companies tick is cash flow – if a company doesn’t generate cash and has bills to pay, that’s a problem. Not any more it seems as the rules have changed. Liquidity is so plentiful there is an assumption companies can simply keep borrowing to see themselves out the Virus crisis. Debt apparently does not matter and it is liquidity that matters and has never been so easy due to QE Infinity, Negative Interest Rates and multiple Virus Bailouts. So should we care? Retail is one thing but we also have travel companies like airlines, cruise ships and so on. These businesses are bleeding cash. Apparently, Carnival is still burning more than six hundred million dollars per month just to stay, ahem, “afloat”! (Sorry). Boeing is in a similar mess as Carnival. There is not an airline on the planet that wants new planes – when so many are for sale cheap! The market is making assumptions about the future value of companies and their assets that don’t seem rational in this new uncertain world. The underlying assets aren’t standing the test of time and the looming recession. It’s time to factor crashing real asset values into your investment equations.

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Strategy:

Macro:.

Long EUR @ 1.1210.. Stop raised to 1.1390

Long EURAUD @ 1.6250 stop at 1.6080

Long EURGBP @ .9020 Stop at .8920

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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