Good Morning.. Pretty quiet in Asia with China and HK closed but the Nikkei fell 1.25% after what was a difficult day on Wall St. The virus cases impacting along with what may have been the start of the quarter end rebalancing moves. However it seems that the JPY is no longer a safe haven and JPY crosses hardly moved yesterday. I think gold had been flagging this move to some extent earlier this week. The USD rallied as is the case in risk off periods these days and I think we may see more of this sell-off in equities, which will be very nervous around the release of US virus stats later. I think the market is quite long DAX and a break of 12,000 may seem some throw in the towel (12022 as I type). Another day of risk aversion may be seen and maybe, just maybe, data will start to matter again. On that note we have US weekly jobless claims today, Personal consumption, GDP, Trade balance and Durable goods data. Good luck with that lot!
It is going to be volatile. Canada saw a downgrade in their Long-Term Foreign Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’ (outlook stable) citing the deterioration of Canada’s public finances resulting from the pandemic and to be honest they are in a dreadful state. Canada is going to issue a lot of debt and is reliant on foreign buyers; will they step up? I have gone small long EURCAD here (see below) and remain with the long EURGBP recommendation.
Keep the Faith..
Details 25/06/20
Every now and again the risks come back to the forefront:
–
Just as it seemed money was being moved from MM funds back into risk assets, the markets get a timely reminder that the risks that were clearly there can resurface and matter. The virus data from the US in particular has been nothing short of dreadful in many states, with the Texas governor suggesting a massive virus outbreak is sweeping the state. Houston suggested ICU’s are at 97% capacity. Even cases in Australia seem to be rising again at an alarming rate. It recorded its largest spike in Covid-19 cases since April, raising concerns about a second wave of infections. The VIX rose and stocks fell hard and I am not sure this move is done yet, as we are also in the middle of some serious pension fund selling due to quarter-end rebalancing, which I have been mentioning as a threat earlier this week. The S&P closed down over 2.5% and even the mighty NASDAQ closed down over 2% as it was reported that some Apple stores were closing again, while the Nikkei was down 1.25% overnight. The IMF projected a deeper recession and slower recovery for the virus-ravaged world economy than it anticipated two months ago and rightly so.
The chart above is a 4hour S&P chart and the move looks set to extend to me.
This will be a major setback to the travel and airline businesses as the vaccine proves illusive still and this was always the threat from unlocking economies. But I still think the slow recovery in unemployment is still to be factored in and maybe, just maybe, data will start to matter again. The unlocking has seen an obvious spike in data recently as fully expected but it is what happens next that is important when the dust settles. I do not see a rapid return to anywhere near previous levels of unemployment and even the Fed forecasts 9% at year-end, which I see as rather a conservative figure. I will be amazed if its less than 10% and the dawning of that reality will have a marked impact on the US and global economies. Unemployment does not just affect the unemployed as it puts serious doubt over job security in those that are lucky enough to still have a job and that will impact spending habits; it always does.
I think gold has been signalling some nervousness in investors as it hit an 8yr high yesterday, as investors look for hedges but gold can also get caught up in a global rout in equities as seen earlier this year.
When margin calls hit, anything with a profit in it is discarded to pay the bills. It will be interesting if we see Fed speakers sent out to calm markets but to be honest they have probably done all they can for now. Kudlow and Trump will be nervous as stocks fall and will probably suggest they are pushing hard for more stimulus, which will be needed when so many programmes expire in July. Time is running out and millions may yet to have received payments but the democrats will not want to help Trump take credit for that so close to the election and are suggesting any funds be used for infra-structure spending, if at all. Trump knows that a hard sell-off will impact his chances in the election and the Fed knows that a rout in stocks could set the recession in stone. If history is anything to go by, we will see solid demand on this dip in equities but the markets will be susceptible to any news on the virus but also we are getting more anti-China rhetoric from the US and we need to keep an eye on this.
With doubt over further support coming and states facing another fiscal crisis that will inevitably lead to a wave of state- and municipal-level tax hikes in the coming months and millions of Americans are finally starting to reckon with the untenable financial realities they now find themselves in. Americans, like so many in the developed world, have survived and sponsored their lifestyles with debt and have got used to living without savings. That may have been a huge mistake. If the outlook remains rather bleak, many may work to reduce debt and push non-essential spending out of their thoughts going forwards. Americans have skipped payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit the U.S., the latest sign of the toll the pandemic is taking on people’s finances. This is real and there is nothing the Fed can do about it. This falls to the US government who are locked in a political battle with the opposition and getting anything done may not be possible. According to a WSJ article, 106 million have “enrolled in deferment, forbearance or some other type of relief since March 1”, a level that is triple what was estimated at the end of April just one month prior. Yup 106 million people.
The proponents of the V-shaped recovery are locking onto the better data as economies unlock. To that end, there’s been a fundamental misreading of what PMI’s have to say on the matter. These, like the economy itself, bottomed out two months ago in April. Since then, they’ve been rising rapidly, which has been taken as a sign of the “V.” As economies have reopened to some degree, the upward leg of these sentiment indices is in too many places equated with a return to growth. All that we have seen is that sentiment has improved and that is obvious after businesses were forced to shutter. What’s instead happening is that the upward slope of the PMI, like the employment report, is being extrapolated in a straight line into the months ahead. This from Markit themselves; “Any return to growth will be prone to losing momentum due to persistent weak demand for many goods and services, linked in turn to ongoing social distancing, high unemployment and uncertainty about the outlook, curbing spending by businesses and households. The recovery could also be derailed by new waves of virus infections.” True and wise words indeed but up to now, equity investors have been happy to ignore all data and just believe that the Fed will never allow a stock market dump. That may be so, but it does not mean we can’t have a few days like we saw yesterday.
I have mentioned before that companies are going to be slashing costs in the near future to try and shore up damaged earnings. If companies are in cost-cutting mode (and they obviously are), then that immediately puts a ceiling on the right side of the hoped-for “V” and then sets up the potential second wave of the financial crisis of 2008 in my view and economic contraction. How? A weak labour market means instead of say 90% of the 106 million mentioned above in the WSJ article, work out their loan (or rent) situation before it goes too far, only 85% maybe even just 80% do! Heaven forbid something like 75%. Ninety percent would already be big trouble. Plus, many businesses will not survive this and a wave of bankruptcies are coming but can the Fed really bail them all out; or should they? But the credit markets seem to feel secure as the Fed is actively keeping the oil in the machine (for now). If credit markets do stress then we may see the big one in asset markets; but the Fed knows the implications of this and so the dip, wherever that is, will probably attract again in global equities. It’s going to be a choppy and volatile run into year-end but at present, the S&P is still in a 2910-3250 range. Keep an eye on the base of that in coming days!
Meanwhile, Fitch Ratings has downgraded Canada’s Long-Term Foreign Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’ (outlook stable) citing the deterioration of Canada’s public finances resulting from the pandemic and to be honest they are in a dreadful state. Canada will run a much expanded general government deficit in 2020 and emerge from recession with much higher public debt ratios. The higher deficit is largely driven by public spending to counteract a sharp fall in output as parts of the economy were shuttered to contain the spread of the coronavirus. Although this will support recovery, the economy’s investment and growth prospects face challenges.
Daily USDCAD chart above showing a potential early rally forming with MACD crossing. Short term still looks a bit sideways but this and the roll over in oil may see this extend but maybe a better move may be against something rather than the USD.
EURCAD (Daily chart above) has been going sideways forever; I just wonder if this may break. I am keeping an eye on this and will dip a toe in here in small size at 1.5340 with a tight stop at 1.5220 just below the mid ma.
Canada’s net external debt/GDP, 44.9%, is elevated and its current account deficit/GDP, 2.0%, is wide relative to the current ‘AA’ medians, a 18.6% net creditor position and a 2.3% surplus, respectively for 2019. The important thing here is that Non-resident holdings of Canadian securities has risen to 52.6% of GDP in 2019 (of which corporate exposure is 30.8% of GDP and government exposure 28.3% of GDP) up from 24.7% of GDP in 2008. The question is if the foreign buyers remain faithful to this situation as Canada is very reliant on foreign funds to soak up all this issuance. All this as Finance Minister Bill Morneau told lawmakers late Tuesday the government is assessing whether to shift strategy in a way that would mean additional issuance of longer-dated government bonds. That is a clear and apparent risk to me. No one talks of sovereign risk anymore but while the US, holders of the worlds reserve currency may get away with this, many others may struggle, especially if the yields do not cover the risks, which is the case in many countries now. Having said that, Austria launched a 100yr bond yielding less than 1%; has the world gone totally mad!
—————————————————————————————————————-
Strategy:
Macro:.
Long EURGBP @.8978 added @ .8940. Raising stop to .8940
Long EURCAD @ 1.5340.. Stop at 1.5220
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.
