Good Morning.. An interesting session yesterday with a weak USD for most of it but we failed at some important areas with EUR failing to break 1.1353 and USDJPY failing to break 105.98. The JPY was an interesting move and I wonder if it may be connected to SoftBank shedding massive stakes in foreign firms and bringing money home. I am not sure this USDJPY sell off is complete just yet. EURGBP broke back up to the highs and I still see this higher but it’s a slow ride. Not much above in the charts and the future still looks rather bleak for the UK in my view but the direction of the broad USD is not that clear here. I think investors are looking to see who emerges from the crisis first and strongest and looking at the PMI data, it could be the EU! It is early days for making such assumptions. But it seems MM funds are being tapped to put money back to work and that may see US assets keep rising but we may be close to seeing some impact from quarter end Pension fund rebalancing hit equities. German IFO this morning but does data even matter anymore? I never thought I would say that but the central banks have changed everything. Sad; but true.

Keep the Faith..

Details 24/06/20

Johnson unlocks the UK as economy struggles: PMIs were strong:

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Boris Johnson made a big attempt to get the UK back to work and school yesterday and hopefully, this may see a recovery in what seems one of the weaker economies. The virus has hit the UK very hard and one of the reasons I remain bullish on EURGBP is that I see the UK as a laggard when it comes to the recovery of global economies. It still faces some very nervous moments regarding trade ahead and the world knows we are desperate for trade deals and thus, we are unlikely to be in the driving seat with most of those negotiations; we are playing a weak hand. According to BoA, the Pound is becoming more like an emerging market currency! The cheek of it; but they may have a point as they suggest that movements in the currency since the June 2016 Brexit vote have become “neurotic at best, unfathomable at worst”. As I say, they have a point and I think is may still struggle against a few and liquidity is sometimes scarce.

PMI data from the UK beat estimates and manufacturing even moved back above 50 but PMIs everywhere were strong, especially in France.

Interestingly, we saw a decent move higher in EUR after the PMI releases there and came close to the chart resistance of 1.1353. US PMI was less convincing and I wonder if investors see the EU coming out of this crisis quicker. The US dollar suffered for most of the day until Kudlow started talking of more stimulus and no more lockdowns. But the EU data was impressive and there were constructive talks between Macron and Rutte on the joint bond proposal. If they get this passed, which may take a while to be honest, the EUR may surprise and we have turned a point now where Germany is spending too. Macron travelled to the Netherlands on Tuesday evening to try to break Rutte’s resistance to the European Union’s 750 billion euro ($848.18 billion) aid package that the French president wants to see approved at an EU summit in July. Meanwhile the UK stumbles towards a Brexit trade decision with both parties still some way apart on issues which neither seem prepared to compromise on. I do not think Boris wants to walk but he may have to.

As the USD fell yesterday, we also saw some volatility for a change in USDJPY which halted its slide just in front of chart support at 105.98. This was interesting and I wonder if this has anything to do with SoftBank selling off global stakes in companies and focusing on repatriating funds and buying their own stock. The disinvestment will be quite large and may cap the USDJPY for the next few weeks and I can see that chart level broken soon, especially if the USD has another sell-off. The direction of the dollar is far from clear here as I think investors are still looking to see who emerges first and strongest from the crisis. But US assets are still in demand and it looks like MM funds are being tapped to fund US asset buying now. MM funds had seen some serious inflows through the crisis in March and May but these funds have now experienced outflows for four consecutive weeks, totalling almost $105bn. Portfolio managers and bankers report that some investors are diverting cash into higher-yielding investments, such as corporate bonds but I am sure some are moving into equities too.

To be honest, there are still few alternatives for investors but more seem keen to be in the credit space now that the Fed has their backs. It seems that as long as the central banks are prepared to keep rates at zero and keep inflated balance sheets, stocks will likely be bought on any dip still. That is all that matters now. 3250 on the S&P would not surprise me at all but nor would 2950 to be honest. That seems to be the range for now but FOMO is starting to grab stocks. Despite a grim economic outlook as coronavirus cases surge in parts of the US, the S&P 500 has clawed back most of its losses for the year while the technology-heavy Nasdaq Composite has set new highs. Investment-grade US corporate bonds, meanwhile, have returned 4.8 per cent in 2020 so far.

Line chart of Total assets held in money market funds, by fund type ($tn) showing Investors and corporate treasurers are redeploying their cash

It seems the credit markets are the latest fashion and that is solely down to the Fed.

What I do find disturbing is that is appears that data is rapidly becoming irrelevant as stocks focus solely on Fed stimulus. It shouldn’t be the case but that is clearly what we are seeing. The last 3 months have clearly changed the dominance of data on FX and equity markets. I am not sure this can last but at present is clearly the case. Mind you. the way some of the data is collected, seasonally adjusted and revised, even makes me question its validity at times. The idea that markets are not the economy is starting to be disproven but for how long can this go on? Can we really ignore unemployment data or earnings? The Fed has totally transformed the way investors think and act. My point here is that just as everyone is piling into the Fed-protected credit space, bankruptcies and defaults are on the rise.

I am not sure at all that this issue is going away anytime soon. As I have mentioned before, there is a striking correlation between the unemployment rate and loan delinquencies.

I am not convinced that US Unemployment levels will fall back anywhere near where they were for a very long time. I will revisit this cart in a couple of months, as the US unemployment data is shockingly inconsistent at present. The data seems more like guesswork than science, which exposes the poor way in which this is collected and messed about with. It is also worth bearing in mind the impact of the few in the S&P. The market capitalisation of the five largest stocks combined; Apple, Microsoft, Amazon, Alphabet, and Facebook – rose to a new record yesterday of $6.18 trillion. Since their combined low point on March 16, their market capitalisation has soared by 51%. That’s an increase of $2.1 trillion in a little over three months. Since January 2017, the top 5 index (if there was one) has soared by 164%. Stunning statistics.

Let’s take the five largest stocks out of the largest stock market in the world, with 3,451 companies, and see what’s left over. What’s left over is now valued at $25.7 trillion. It’s up by 28.4% from the March 23 low, and while that’s still strong for a three-month rally, it’s a far cry from the 51% for the Giant 5. And here is the thing: All these companies combined, minus the “Giant 5,” are way below their peak in February 2020, and below a whole bunch of other dates before then, and below where they’d first been at the end of January 2018. Apple and Microsoft both are now worth over $1.5 trillion. Amazon is at nearly $1.4 trillion, Alphabet at $1.0 trillion. These are gigantic valuations. They also speak of an immense concentration of power in a single company. The only way I can see a big fall in global stock markets is if these 5 take a big hit. Will that come through digital taxation? I am not sure but these stocks dominate global equity markets and that compression is dangerous. We have seen compressions similar to this before and it didn’t end well but standing in front of this is still dangerous right now.

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Strategy:

Macro:.

Long EURGBP @.8978 added @ .8940. Raising stop to .8940

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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