Good Morning.. Hope springs eternal as some cities see a dip in cases but be wary of chasing stocks up here; businesses will remain closed for some time and this is NO all-clear. Italy is considering a mid-May exit strategy from the shutdown based on modelling but they are way ahead of the UK or the US. In many states across the US, there is scant disregard for the lockdown calls. Data is about to pick up the impact of the shutdowns and last night saw UK consumer confidence dump and similar numbers will spread across the global economy. GBP also took a hit from news that the PM was in hospital but while I am sure he will get better soon, the EU may be beyond repair (see below) and this EURGBP rally may be a great sell again. The USD is a tougher call and is starting to follow risk but with all this stimulus around the world, the threat of inflation or possibly stagflation at some point in the future cannot be ruled out. No data of note today so it will all be about whether stocks can hold. They look a little high to me.

Keep the Faith..

Details 06/04/20

US unemployment set to worsen; What about that OPEC+ deal? Johnson in hospital as UK confidence collapses but the EU faces a bigger problem:

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The US unemployment data Friday was shocking to say the least and the danger here is that is a lot worse next month. But for most of the session, the markets were focused on oil for some reason as hope of an OPEC+ meeting suggesting that oil production will be cut across all members drove oil violently higher. The realisation finally dawned that the unemployment issue, for the US at least, is a much bigger issue, as indeed I had suggested in the daily last week and stocks pared gains. This is so much more than about oil and it is not even certain now that this tele-conference goes ahead and as Kudlow said Friday, the US is not part of OPEC and may not want to damage US oil interests. There still seems some doubt as to whether Russia will play ball and the Saudi’s are calling for cuts from every producer out there. The reality is that the US may be the problem now. Saudi Arabia, Russia and other large oil producers are racing to negotiate a deal to stem the historic price rout, as diplomats pressed to get the U.S. to join the coalition. It is not certain they will but the US is still facing a bigger problem to its economy; namely the virus shutting down businesses at a dramatic rate. This is not about oil.

In March, the unemployment rate increased by 0.9 percentage point to 4.4 percent. This is the largest over-the-month increase in the rate since January 1975, when the increase was also 0.9 percentage point. The number of unemployed persons rose by 1.4 million to 7.1 million in March. Yikes! (It’s going to get worse).

OPEC+ could not even agree to a meeting scheduled for today! The talks still face significant obstacles: a meeting of producers from OPEC+ and beyond — delayed from Monday — is only tentatively scheduled for Thursday as negotiators work against the clock. The aim, first revealed by President Donald Trump, is to cut oil production by about 10% — the biggest ever coordinated reduction. There is a lot of water that can flow under the bridge between today and Thursday IF the meeting does take place. Oil has fallen 50% this year, as the economic effects of the pandemic have knocked out about a third off global demand and there lies the problem. A 10bln bpd cut is still less than the demand has fallen (estimated at 15bbpd), again, as I mentioned last week. There is still a war on here in oil. The delay came hours after Saudi Arabia made a pointed diplomatic attack on Putin, opening a fresh rift between the world’s two largest oil exporters and jeopardizing a deal to cut production. In a statement early on Saturday, the Saudi Foreign Minister said comments by Putin laying blame on Riyadh for the end of the OPEC+ pact between the two countries in March were “fully devoid of truth.” Saudi Arabia and Russia both say they want the U.S., which has become the world’s largest producer thanks to the shale revolution, to join the cuts. But Trump had only hostile words for OPEC on Saturday, and threatened tariffs on foreign oil. Great start guys but this is a diversion from the real issues facing the world.

As suggested, the US has become the centre of the coronavirus outbreak, with the situation worsening there at an accelerating pace as it shows signs of peaking in continental Europe where it first shifted from Asia. There is talk that NY cases may be peaking but the US is still facing a long period of lockdown if they really want to eradicate this. The danger is that many start believing that they can go about their normal lives again. London saw a brief dip in cases but then rebounded. Businesses will remain shuttered and jobs will continue to be lost at a shocking rate. So where are we on peak virus?

This is JPM’s version of events and if anywhere near correct, there is clearly more pain to come and rising oil prices are NOT going to help. The chart above is not science and probably quite a bit of guesswork but the danger here is that the world is not over this issue yet. Even if we hit peak virus, will we be allowed to return to work or some sense of normal life again? What level justifies the all-clear? Italy is talking an exit strategy in mid-May. It may take a while longer unless we get a major breakthrough and there is some hope with scientists working flat out on a vaccine. But hope is all we have right now. In the UK, PM Johnson has been sent to hospital and word is, he is on a ventilator.

The data are starting to pick up the enormity of businesses shutting down and its impact on the consumer. Overnight UK Consumer confidence for March, crashed to its lowest level since the financial crisis. The index, compiled by GfK, plummeted from minus 7 in February to minus 34 at the end of March.

Let’s concentrate on facts and for that we can only look backwards. Putting the past two weeks in context, back on March 24 there were roughly 350,000 global cases, with 15,000 deaths. As of today, there are now 1.2 million cases and rising by 80,000 every day, with roughly 67,000 deaths and rising by about 8,000 per day. That is the reality but indeed there is some light at the end of the tunnel but again it all depends how quickly the global economy can recover. How can governments balance lives against a return to work? What risks are they prepared to take as peak virus is NOT an all clear? The issue here is that there are more shocks coming.

It is not a question of whether the US earnings will be bad, the question is how bad it is going to be. Only about 17% of all earnings estimates across the S&P 500 were revised last week. This compares to an economy where almost 100% of businesses are shut down – and where those that aren’t shut down will definitely be feeling an impact. There are still shocks coming in US data and the unemployment issue is just part of it.

The earnings coming up are probably going to be the most unpredictable or worst estimates ever seen in the history of the US. It’s a completely different world now and anyone who lived through the financial crisis can’t think the way they did then. When, apart from during a world war, have we ever seen the world stop? I just cannot see a v-shaped recovery and the data will likely see Q3 just as bad if not worse. China is not in a position to drag us all out of this by any means. I am sorry but we may be into 2021 before things start to even look like they were.

The only issue here is I am not sure what that ends up meaning for the USD. For now I can understand the rush into the USD as a safe haven but the US could be the hardest hit in all this and with a supply hit, could be looking at stagflation and that would see the USD fall hard. In the short term the world faces a deflationary hit but further down the road, the idea of inflation returning is very real with all the stimulus in place. Will the central banks be prepared or even able to reverse this in time to stop inflation taking hold? Maybe we should hold some gold. We saw quite a bit of profit taking in GBP Friday which I expected, which was why I suggested taking a large percentage of profits in EURGBP down near .8760.

Johnson being sent to hospital has seen further losses for GBP, so we need to be cautious here but to my mind the EU is still facing an existential threat. Johnson is more than likely to recover soon but the EU may be broken beyond repair as Italy is asking a very valid question; “what is the point of staying in a union that is clearly dysfunctional and that favours the few wealthy nations”? This rally in EURGBP may be an opportunity again.

There is a rising feeling among even its pro-European elite that the country is being abandoned by its neighbours and it is. “A massive, massive shift is happening in Italy. You have thousands of pro-Europeans moving to this position,” says Mr Calenda, who leads the recently formed liberal Action party, a hugely pro EU party! There are already signs that Italian faith in the EU has been damaged. In a survey conducted last month by Tecnè, 67 per cent of respondents said they believed being part of the union was a disadvantage for their country, up from 47 per cent in November 2018 according to the FT this morning. Finance ministers will meet on Tuesday to attempt to agree a package of measures aimed at marshalling greater Europe-wide fiscal firepower. This rally in EURGBP up at .8850 may well be an opportunity. There are all sorts of frightening estimates for Italian GDP now but with the country entering the crisis with a debt-to-GDP ratio already at 136 per cent, there is a real threat that Italy’s debt reaches a level that brings into question its sustainability.

Stocks are higher across Asia (China was closed) and S&P futures are up over 4% as some large cities see a dip in deaths which is wonderful news. The question is how long until businesses can reopen? Until then we have to suggest selling these equity rallies which are based solely on hope. GfK’s main purchase index, which is based on whether people think it is the right time to buy items such as electrical goods or furniture, plunged from 6 in February to minus 52 at the end of March. I would think similar data will be seen across the developed world and that includes the US. The psychological damage done to the global consumer may not have been priced yet. It may be a tad early for thoughts of FOMO. It will be interesting to see if this rally can hold. It does seem that many are looking for a base to be in now. I am not sure about that. It is indeed good news that deaths are falling but businesses are not opening. Italy, through its modelling and following China data, is looking at mid-May for a reopening of some businesses but they are ahead of the UK, Spain and the US. A lot of bad data is on the way and many jobs will be lost before the all-clear is finally sounded.

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Strategy:

Macro:.

Short EURGBP @ 8901.. Stop @ entry now (took substantial profits at.8760)

Short S&P 2558

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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