Til All Is Clear

There’s certainly no need to fear
A global pandemic is here
Cause central banks will
Continue to fill
Their balance sheets ‘til all is clear

Once again, investors and traders (and algorithms) have surveyed the landscape, read the government reports, and determined that there’s nothing to see in China and that any impact on economic output from the still spreading coronavirus is diminishing and unimportant in the long run. And who knows, maybe that is the correct attitude. Perhaps all the worrywarts are just that, hanging their hat on the latest potential problem while ignoring how fantastic things are right in front of them.

Or…maybe things are not quite as rosy as government officials would have you believe and the impact on economic output is going to be much more severe than anyone is willing to admit at this time. In fairness, ruling governments are pretty unlikely to release bad news to their constituents for obvious reasons. In fact, this is what causes cover-ups all the time, and why the fallout, when the truth eventually does reveal itself, is so devastating for that government. Added to this reality is that the veracity of information that emanates from China has been called into question for many years, so it is quite easy to believe that the official coronavirus figures are not accurate.

With that in mind, I urge everyone to read the attached link (https://www.epsilontheory.com/body-count/) as Dr. Ben Hunt does a very effective job (far more effective than I ever could) of explaining just how the numbers can be massaged to indicate a slowing rate of infection that ‘seems’ believable, but is in fact complete hogwash. However, as long as this is the official line, and it defines the data that is reported, then trading algorithms will utilize the data and trade accordingly. Right now, any slowdown in reported deaths is clearly seen as a sign that the worst is behind us and with all the monetary stimulus still sloshing around the system, risk needs to be acquired. And that is what we are seeing again today. Clearly, last Friday was an aberration, though when it comes to equities these days, caveat emptor!

Taking this into account, let’s take a tour of markets this morning to see how things are doing. Risk is clearly in favor as equity markets around the world continue to rally following yesterday’s record-setting session in the US. While Japan was closed for National Foundation Day, the rest of Asia rallied pretty nicely with the Hang Seng rising 1.25% and Shanghai + 0.4%. European markets have followed suit (DAX +0.85%, CAC +0.45%, FTSE100 +0.85%) and US futures are all pointing higher as well. Bond markets are on the soft side, although hardly collapsing as 10-year yields in the US are trading at 1.58% as I type, and the dollar is arguably a bit softer rather than firmer this morning. In fact the only two currencies weaker than the dollar this morning are the Swiss franc and Japanese yen, although each has declined by less than 0.10%.

The UK has been the source of the most new information as there was a significant data dump, almost all of which was seen as a positive for the UK, and by extension the pound. Q4 GDP printed at 0.0%, as expected, but the December number was a better than expected 0.3% and the Y/Y number did not fall as expected, but instead printed unchanged at 1.1%. Now, while these are hardly stellar numbers in the broad scheme of things, they are substantially better than the Eurozone story, and more importantly, better than expectations. Exports rose 4.1%, the Trade Balance ticked into a ₤845M surplus, which is actually the largest surplus in the series’ history dating back to 1955! While IP was a little softer than expected at +0.1%, the overall picture was of a UK that is prepared to weather Brexit quite well. And the pound is slightly higher on the day, but just 0.15%.

Rather, the two biggest gainers in the G10 today are NOK (+0.4%) and AUD (+0.3%). The former is benefitting from the rebound in oil on the back of the idea that the coronavirus problem has passed its peak, and the latter is benefitting on the same idea. In fact, all the currencies that have been negatively impacted by the coronavirus story, mostly commodity exporting countries like Australia, Brazil and South Africa, are higher this morning on this idea that things are going great in China. I sure hope that’s the case, but I remain a skeptic.

Today’s other noteworthy event will be the testimony by Chairman Powell to the House Financial Services Committee, starting at 10:00. I’m sure his prepared remarks will simply rehash that the economy is in a good place and that the Fed remains vigilant. He is also likely to mention that the virus is a potential risk to the economy, but one that they feel confident they can handle. (After all, cutting rates and printing money seems to be the cure for everything under the sun.) However, given the distinct lack of financial and economic nous that our duly elected Representatives have continuously shown they possess, I think the Q&A will be more interesting, although ultimately I imagine that Powell will simply have to explain his opening statement in more simplistic terms for them to understand.

We have already seen the NFIB Small Business Optimism Index rise to 104.3, a better than expected outcome and certainly a positive fillip to the risk attitude. Right when Powell begins to speak we will see the JOLTs Jobs Report as well (exp 6.925M) which many see as an important indicator of labor market conditions. In addition to Powell, we will hear from SF Fed President Daly as well as Quarles, Bullard and Kashkari, amongst the most dovish of all Fed members, and so be prepared for more discussion of allowing inflation to run hot and the need for quick action in the event the currently reported Chinese data is not complete.

Overall, the dollar is under very modest pressure today, but it would be fair to call it unchanged in the broad scheme of things. Unless Powell makes a gaffe, something which seems less and less likely given his experience now, as long as risk is being acquired, I think EMG currencies are likely to perform well, but vs. the G10, the dollar may maintain its recent momentum.

Good luck
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