Good morning.. Wall St gave up gains after Gilead trails failed to show anything positive and Asian markets were lower. EU leaders yet again failed to agree on how to distribute what could be a decent package and this may drag on. Is there a compromise between a grant and a loan? It seems we are at peak everything with peak globalisation, peak growth and now maybe peak EU. I am not surprised at all the EUR is lower but it should be and EU banks get hit again. More downgrades to come there I feel. Meanwhile the USD catches a bid and this may surprise soon and it’s bad news for the EM space and may top out equities. I was a tad early with my CAD call but the USD will help and I think oil rolls over soon. I am struggling to see an alternative to the USD but there are some pockets of strength so crosses may also have value. To my mind the credit markets are yet to feel the full impact on upcoming default risks and that will impact stocks at some point. The consumer is not about to just pick up where they left off and this an important prop to most economies. Risks clearly remain. Data seems to be ignored now for some unknown reason but we do get German IFO and US Durables today and it’s a Friday so, “Be careful out there”..
Keep the Faith..
Data.. All Times BST
09:00.. Germany IFO Business Climate Cons:80.0 Prev:86.1
Germany IFO Current assessment Cons:81 prev:93
Germany IFO Expectations Cons:75 prev:79.7
11:30.. Rusia Russia Rate Cons:5.50% Prev:6.00%
13:30.. US Durable Goods Orders (Prelim) Cons:-12.0% Prev:1.2%
US Core Durable Goods Orders (Prelim) Cons:-5.8 prev:-0.6
15:00.. US Univ. of Michigan Conf (Final) Cons:67.9 Prev:71.0
Details 24/04/20
A lot of talk after the EU meeting bit no agreement yet: The USD is bid.
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There were a few interviews after the EU leaders meeting yesterday but in essence, no agreement was found. Apparently, Merkel has told fellow EU leaders that Germany is prepared to make a substantial financial contribution to help relaunch the region’s economies as member states asked the European Commission to create a “recovery fund”. But it seems delivering this is not going to be easy and differences of opinion remain. To be honest, I am surprised the EUR is not lower across the board. But it does seem that the package, if and when it gets delivered, could be of some size. Her country was ready, she said, to join in a huge common effort worth around €1tn. Big talk but problems remain. While the leaders agreed to ask the commission to establish a recovery fund, they failed to find common ground on its size and, crucially, on whether it should hand out grants or loans. This is the stumbling block. Ursula von der Leyen, commission president, warned there were huge differences between member states’ abilities to boost their economies and industries, given their varying fiscal situations, and said the EU would need to “counterbalance” that. Good luck with that as there are still massive divisions on the way this is put together. Meanwhile EU banks continue to get hammered.
Italian PM Conte summed up the situation perfectly when he said this was a political emergency and he is right; it is. But this is not going to see Germany, or the Netherlands open up the coffers for the weak to plunder and never pay back. They didn’t sign up to this and is a major hurdle that I think is insurmountable. Something is going to have to bend. Is there such a thing as a compromise between grants and loans? If there is the leaders will spend forever searching for it as is “the nature of the beast”. That means there will be long delays, more talks and more political tension. Goodness they love a crisis. Meanwhile the economic data continue to spiral down in the EU as the PMI data, especially services data, collapsed yesterday. EU banks still seem to be in trouble and many seem to have been fully loaded on derivatives that got hammered as vols rose. This uncertainty is not what investors need right now with everything else going on and they may turn their backs and focus elsewhere. The USD yet again may benefit and I can see a decent spike higher in the USD still to come. That will put more pressure on the EM space and possibly top stocks out.
The divisions are still between the wealthy and the weak in the EU. France, Italy and Spain led demands for grants to stricken economies, whereas Merkel insisted that any funding borrowed on the markets must ultimately be paid back. There were “limits” on what kind of aid could be offered, she told leaders, adding that grants “do not belong in the category of what I can agree”. But it is grants that the weaker nations are seeking and this could be a deal breaker. Talks will go on and on I guess and many parties are under political pressure to hold out on both sides of the argument. Data continues to be ignored and some suggest it is meaningless. I have never heard such twaddle in all my life. The point yet again is this data is not just going to miraculously recover in a month and we all go back to normal. With all we are seeing, the very real danger is that economies take quite some time to recover and the costs every week are huge keeping them on life support. But it is the damage done to the psyche of the global consumer in all this that matters.
Modern economies are geared to strong consumer activity and strong purchasing habits. I just do not see the demand for non-essential goods at a time like this. I am not sure oil can rally much more either as demand is not about to pick up either. I was a tad early with my long USDCAD recommendation but am sticking with it as the USD component is starting to move higher now and may surprise. It is all very well suggesting that equity investors are looking forwards but they are clearly seeing something that I am not. I can see some real hardship coming and certain stress in credit markets still to come. The wave of defaults has not hit yet; are equity investors going to look through those as well? The central banks cannot bail everyone out. Central banks are doing a lot and the BoJ is talking of unlimited bond buying. There aren’t that many bonds available and shows just how broken this Japanese bond market is now. Still Japan shows no growth and no inflation and most central banks are following their disastrous template. Do we really want bond markets that no longer tell us anything about the state of the economy looking forwards? Please Jerome, do not go down this path.
To show how concerned some are, it is fascinating to see that despite the trillions the US is adding to the budget deficit and national debt, investors (many foreign) will lend the US a virtually limitless supply of dollars for .6% for 10 years. Rather worrying is the fact that the yield on the US debt does not reflect market supply and demand – and hasn’t reflected the market for a decade – but merely the Fed’s constant intervention, and recently, the takeover of the bond market and the Fed balance sheet balloons higher.
Without any doubt at all this is creating moral hazard and central banks are destroying price discovery. This is high risk in my view and means the central banks “can check out but never leave”. Can they ever take back all this? They are kidnapped by the markets which they seem desperate to totally control. Companies from airlines to energy firms have been running businesses at high leverage and high debt with no cash security at all for when things slowdown and that is just reckless; they deserve not to be bailed out. Irresponsible methods deserve what they get; not a bailout to encourage more of the same. Some airlines will not survive and rightly so and many energy firms may be in a queue for default. This is what is yet to come and for me, equity investors are either blind to this or just do not want to look. The stress in the credit space is only just starting.
Look at all the CBs have done and where is the growth and inflation? I am not sure what it is going to take to see growth pick up again to any kind of normality as CB activity actually supresses growth; just look at Japan again. To my mind, we may be at peak virus but we may also be at peak globalisation, peak growth and even peak EU. Macron raised a critical question on Friday in the F.T – Is Europe a political union or a mercantile club? The answer is still unknown! Maybe Italy will use its trump card and threaten to hold a referendum on the EU; will someone else consider leaving? Maybe Hungary feels they would be better off. The move away from a globalised economy is a dangerous one with geopolitical ramifications that go deep and it is worth pointing out that this is being driven by America. That means it will happen. What is this new normal we are about to walk into when this virus passes? The real problem is that debt does matter for those that do not have the worlds reserve currency. Sovereign defaults are not impossible as we can already see around the developing world. Corporate and sovereign defaults are still a very real threat in this new age. Markets surged on the Fed’s talk of buying everything. BUT while the Fed has expanded the balance sheet they are actually cutting back on purchases as indeed the Fed said they would. In fact, despite all the hype and the dash for equities, it didn’t buy junk bonds, it didn’t buy ETFs, it didn’t buy stocks, it didn’t buy old bicycles. I said it could but so far it hasn’t.
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Strategy:
Macro:.
Small short S&P @ 2773 adding here at 2809. Stop above 2880.
Long USDCAD 1.4140. Stop 1.3850ish.
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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