Good Morning. Well, Trump did little to calm nerves; what is he smoking? I think volatility is here for a while longer but that does not mean we can’t have a serious bounce and month-end distortions may start to impact and markets may reverse after such huge moves. There is a danger that the spec market is very short now and I would not be surprised at all if we see something of a bounce today. But holding a position in stocks looking to scalp is high-octane stuff. AUDJPY may have a bounce here as both seem to have found some support but I m holding on to gold for a more macro play into the election. I will reduce my stops down to $1580. US data today may not pick up the fear and dread and probably will have a s/t impact but next week may be different as we get ISM and NFPs. It’s going to be noisy today so trade according or do nothing unless you have to.. Quite a few CB speakers today..
Keep the Faith..
Data.. All Times GMT
09:00.. Italy Consumer Confidence Feb Cons: 111.4 Prev 111.8
10:00.. EU Business and Consumer survey Feb Cons: 102.8 Prev 102.8
13:30.. US Core PCE q/q Cons: 1.3% Prev: 1.3%
US GDP Annualized q/q Cons: 2.1% Prev:2.1%
US Initial Jobless Claims Cons: 212k Prev: 210k
US Durable Goods Orders (Prelim) Cons: -1.5% Prev: 2.4%
US Core Durable Goods Orders (Prelim) Cons: 0.2% Prev -0.1%
15:00.. US Pending Home Sales m/m Cons: 2.2% Prev: -4.9%
Speakers:..
09:30.. ECB Speaker: Panetta (Dovish), at 4th meeting of the Euro Cyber Resilience Board. Text: Yes
09:45.. ECB President Lagarde (Dovish), in London
10:05.. ECB Speaker: Schnabel (Neutral), in London
10:30.. BoE Speaker: Cunliffe (Dovish), on a Panel in London
10:30.. ECB Speaker: Schnabel (Neutral), Q&A discussion at Barclays International Monetary Policy
12:15.. ECB Speaker: Lane (Very Dovish), in Paris
Details 27/02/20
Trading stocks now comes with a health warning: S/T bounce overdue: Massive government stimulus starting?
To say US stock markets were choppy yesterday would be something of an understatement and trying to day trade this is high octane stuff. The swings yesterday were a sign of a market in some stress and it seems to me that this volatility is here for a while yet. Vols are not coming down yet as the pace of cases rises and falls, deaths occur, treatments and cures are found, and we see more reaction from the authorities, then the likelihood for sustained market volatility increases. Those that hedged in good time may have saved some money but even some of those have not paid off well but bonds have soared and looking back, those US equity put options seem extremely cheap now. It pays to hedge when vols are cheap and not when you are forced to. Margin calls are hitting the mat and vols remain bid. The US 30yr hit 1.8 and 10s 1.3% and I am not sure we are done yet and they are a tad lower again this morning after Trump’s speech to calm markets failed dismally. Nikkei fell another 2% and US S&P futures are down another 1% as I type. Following on from Apple, Microsoft Corp, shares fell more than 2% late Wednesday after the software giant said it won’t meet some of its guidance for the fiscal 2020 third quarter due to COVID-19.
The issue I have is that over leveraged funds and CTAs are one thing but many companies have been massively stretched and a lack of demand is starting to hit a multitude of businesses. Wagamama’s has announced it is shuttering 90 stores as demand falls off a cliff and I am sure there are thousands of companies stretched as shoppers stay away in many cities across the globe. Consumer and business confidence must be taking a hit now in many economies. Forward looking or survey data is in danger of falling off a cliff and we start to see some data this week and into next. Data like today’s US GDP is unlikely to pick this up but maybe Durable goods data will and next week’s ISM. A manufacturing recession is something many can deal with but the world cannot deal with a services hit and a lot may be moving into contraction soon. If there is a spill-over into services, then we may have a game changer for many central banks. Whether or not they can save this is unclear as many have little in the toolbox.
But sentiment plays a huge role here and that is now dented with global news coverage in all our homes talking of nothing else and talk of cancelling the Olympics with global travel suspended by many companies and families. Who would book a cruise now? While service PMI and headline data have outstripped their manufacturing peers over the past 24 months, the airline, hotel & hospitality sectors face a more uncertain future (if at all) given their dependency on tourism. Cutting prices can be futile in trying to recover demand as customers simply can’t travel. It is not unthinkable that many countries such as Italy, Thailand and New Zealand face recession risks from the collapse in tourism and HK is on its knees. But companies across the spectrum run on such tight margins now that this could do a lot of damage to many and their lenders will be getting twitchy. Are we looking at a deflationary hit to the global economy and a rise in defaults? Again, I am watching the credit space as oil heads towards the mid-40’s.
A fortnight ago the market priced in a single Fed cut before the end of this year; now it prices in two. We may be pricing in a third, if not a fourth, within a few weeks unless there’s a dramatic change in the Covid-19 news as the damage is becoming plain to predict. The Fed has suggested, that whilst on hold, the risks were still tilted to a cut and cut they will probably have to. With over a full 25bp cut for June (37bps) the Fed is unlikely to disappoint market pricing, they rarely do these days, so, either they walk the markets back or they cut in June. But is there a danger that in a pre-emptive move to restore confidence that they cut in March? Markets are pricing in 8bps now for March Fed from almost zero a weak ago. It’s not fully priced yet but they may start talking that way if the data is poor next week. This Fed is likely to cut if they see a chance of this hitting the consumer or stressing companies into default. The Fed will be watching the credit markets as closely as I am. Right now they appear rather complacent with where the US economy is but the US is NOT immune to all this. At least the Fed have some bullets but the ECB and BoJ are facing some very tough decisions as policy is just about redundant now.
What worries me also is that 10 years of vol suppression is probably not undone in 3 sessions. But this market volatility does not mean US equities just keep falling; we may have a spike or two but so far those rallies have been a sell and probably remain so. Buying the dip is rapidly becoming the pain trade after years of profit. But the US curve is steeper and I think we could see a bounce of some significance in risk in the short term. Having said that, it’s entirely possible restrictions in global travel will push the more vulnerable airlines, energy companies and travel firms into default. Again look to the lenders. Are we in danger of seeing loans cut off or God forbid, taken back? It may be too early for that but I bet a few conversations are being had at the lenders to the more high risk members of the credit space. On top of all this we still have what seems akin to the 100years War going on with the UK and the EU and this is getting ugly. The fight is on trade and fish in particular but I am not sure the two sides are any closer than when we voted to leave. France is again demanding reparations as they did to Germany after the first World War and we know where that got them.
Time to get tough. I pull my hair out with this lot. If we want to trade with Europe, it seems again that it can only be if we accept every rule of the EU. Does anyone outside Brussels understand that’s going to trigger a crisis, as there is no way the UK will accept it. That is why we left in the first place. The smart economic outcome for Europe would be a good trade deal with the UK, where the damage to the Union is minimised and trade carries on as before. But no; not a chance for those in their Ivory Towers. Instead, the French won the argument, together with the Irish who seem to want to humiliate us while Germany sits quietly doing nothing in the background. Macron is playing a stupid game here. Boris is going to have to keep threatening to walk away. That also helps no one. We should tell them that they have a choice and that we’re more than willing to strike side deals with each European state, except for France and Ireland – on everything and anything. The Spanish want our Fish? No problem. The Germans want to sell us their cars? No problem. The Danes want to sell us Bacon? No problem. Let’s chat. Macron; non! Today, Johnson outlines Britain’s goals for a trade deal with the EU, setting up a row over the so-called “level playing field” on which the two sides will do business. A row is brewing over this and looks set to keep these two parties at each other’s throats. It is bad for both parties.
I have recommended holding gold on a few occasions and still see this higher at some point. Gold has outperformed traditional haven currencies, such as the Yen and Swiss Franc, underscoring its status as the safest haven in a world where all currencies are susceptible to a virus-related shock. Bonds have also had a massive move already but while Gold is consolidating here above $1600, I think there is a chance we keep rising and possibly into the US election.
Equity volatility is not going away anytime soon and ETF demand for gold is still strong. There is also a chance that some of the bigger funds start using gold and it will only take a small allocation from them to push gold quite a bit higher. Also, the ECB is likely to cut rates gain and highlights that even zero yield on gold is better than some out there.
Gold remains attractive relative to bonds. It has a greater capacity to increase during the next recession as bonds may be constrained by the lower bound on central bank rates. Gold is also a better hedge against the risk of inflation overshoots and this may attract the bigger asset managers looking to diversify exposure.
It is interesting to see what is going on with Chinese asset markets. One would have expected stocks to be crashing but no. What’s going on? China has thrown an extraordinary amount of monetary stimulus at the problem. They are ignoring the warnings from the China-sceptics who shriek this will cause inflation and that they can’t hold the currency peg. Maybe they are right, but in the meantime, Chinese financial assets are screaming higher. China is massively intervening here and pumping the economy with all it has got and HK is starting to do the same with “helicopter money”. Other global central banks will be watching this and maybe having discussions on just how to deal with this.
The one central bank that would struggle to do this is the ECB. But are others going to take a leaf out of China and HK’s book and stimulate like crazy? If the data starts coming in extremely weak then don’t rule it out. The Hong Kong government has bypassed monetary stimulus and decided to just inject the drug straight into the vein. I have said for a long time that QE just pushes the inflation to asset markets as the banks do not pass it on. This is now a whole new look at stimulus. Could others follow? Maybe as many seem to want inflation up. If so, it will make those TIPs look a great investment. With weak demand and a potential deflationary hit coming, I think we my see more of this; the question is which governments will look at this? Let’s see just how bd global data comes in over the next 3 weeks.
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Strategy:
Macro:.
Long Gold @ $1638.00 Stop below $1580.00.
Macro Long FTSE250 20,900
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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