Prepare For Impact

The second wave nears
A swell? Or a tsunami?
Prepare for impact

The cacophony of concern is rising as the infection count appears to be growing almost everywhere in the world lately. Certainly, here in the US, the breathless headlines about increased cases in Texas, Florida and Arizona have dominated the news cycle, although it turns out some other states are having issues as well. For instance:

In Cali the growth of new cases
Has forced them to rethink the basis
Of easing restrictions
Across jurisdictions
So now they have shut down more places

In fact, it appears that this was the story yesterday afternoon that turned markets around from yet another day of record gains, into losses in the S&P and a very sharp decline in the NASDAQ. And it was this price action that sailed across the Pacific last night as APAC markets all suffered losses of approximately 1.0%. These losses resulted even though Chinese trade data was better than expected for both imports (+2.7% Y/Y) and exports (+0.5% Y/Y) seemingly indicating that the recovery was growing apace there. And, given the euphoria we have seen in Chinese stock markets specifically, it was an even more surprising outcome. Perhaps it is a result of the increased tensions between the US and China across several fronts (Chinese territorial claims, defense sales to Taiwan, sanctions by each country on individuals in the other), but recent history has shown that investors are unconcerned with such things. A more likely explanation is that given the sharp gains that have been seen throughout equity markets in the region lately, a correction was due, and any of these issues could have been a viable catalyst to get it started. After all, a 1% decline is hardly fear inducing.

The problem is not just in the US, though, as we are seeing all of Europe extend border closures for another two weeks. The issue here is that even though infections seem to be trending lower across the Continent, the fact that they will not allow tourists from elsewhere to come continues to devastate those economies which can least afford the situation like Italy, Spain and Greece. The result is that we are likely to continue to see a lagging growth response and continued, and perhaps increased, ECB largesse. Remember all the hoopla regarding the announcement that the EU was going to borrow huge sums of money and issue grants to those countries most in need? Well, at this point, that still seems more aspirational than realistic and the idea that there would be mutualized debt issuance remains just that, an idea, rather than a reality. While the situation in the US remains dire, it is hard to point to Europe and describe the situation as fantastic. One of the biggest speculative positions around these days, aside from owning US tech stocks, is being short the dollar, with futures in both EUR and DXY approaching record levels. While the dollar has clearly underperformed for the past several weeks, it has shown no indication of a collapse, and quite frankly, a short squeeze feels like it is just one catalyst away. Be careful.

Meanwhile, ‘cross the pond, the UK
Saw GDP that did display
A slower rebound
And thus, they have found
Most people won’t come out and play

As we approach the final Brexit outcome at the end of this year, investors are beginning to truly separate the UK from the EU in terms of economic performance.  Alas, for the pound, the latest data from the UK was uninspiring, to say the least.  Monthly GDP in May, the anticipated beginning of the recovery, rose only 1.8%, with the 3M/3M result showing a -19.1% outcome.  IP, Construction and Services all registered worse than expected results, although the trade data showed a surplus as imports collapsed.  The UK is continuing to try to reopen most of the economy, but as we have seen elsewhere throughout the world, there are localized areas where the infection rate is climbing again, and a second lockdown has been put in place.  The market impact here has been exactly what one would have expected with the FTSE 100 (-0.4%) and the pound (-0.3%) both lagging.

To sum things up, the global economy appears to be reopening in fits and starts, and it appears that we are going to continue to see a mixed data picture until Covid-19 has very clearly retreated around the world.

A quick look at markets shows that the Asian equity flu has been passed to Europe with all the indices there lower, most by well over 1.0%, although US futures are currently pointing higher as investors optimistically await Q2 earnings data from the major US banks starting today.  I’m not sure what they are optimistic about, as loan impairments are substantial, but then, I don’t understand the idea that stocks can never go down either.

The dollar, overall, is mixed today, with almost an equal number of gainers and losers in both the G10 and EMG blocs.  The biggest winner in the G10 is SEK (+0.6%), where the krona has outperformed after CPI data showed a higher than expected rate of 0.7% Y/Y.  While this remains far below the Riksbank’s 2.0% target, it certainly alleviates some of the (misguided) fears about a deflationary outcome.  But aside from that, most of the block is +/- 0.2% or less with no real stories to discuss.

On the EMG side, we see a similar distribution of outcomes, although the gains and losses are a bit larger.  MXN (+0.65%) is the leader today, as it seems to be taking its cues from the positive Chinese data with traders looking for a more positive outcome there.  Truthfully, a quick look at the peso shows that it seems to have found a temporary home either side of 22.50, obviously much weaker than its pre-Covid levels, but no longer falling on a daily basis.  Rather, the technical situation implies that by the end of the month we should see a signal as to whether this has merely been a pause ahead of much further weakness, or if the worst is behind us, and a slow grind back to 20.00 or below is on the cards.

Elsewhere in the space we see the CE4 all performing well, as they follow the euro’s modest gains higher this morning, but most Asian currencies felt the sting of the risk-off sentiment overnight to show modest declines.

On the data front, this week brings the following information:

Today CPI 0.5% (0.6% Y/Y)
  -ex food & energy 0.1% (1.1% Y/Y)
Wednesday Empire Manufacturing 10.0
  IP 4.4%
  Capacity Utilization 67.8%
  Fed’s Beige Book  
Thursday Initial Claims 1.25M
  Continuing Claims 17.5M
  Retail Sales 5.0%
  -ex auto 5.0%
  Philly Fed 20.0
  Business Inventories -2.3%
Friday Housing Starts 1180K
  Building Permits 1290K
  Michigan Sentiment 79.0

Source: Bloomberg

So, plenty of data for the week, and arguably a real chance to see how the recovery started off.  It is still concerning that the Claims data is so high, as that implies jobs are not coming back nearly as quickly as a V-shaped recovery would imply.  Also, remember that at the end of the month, the $600/week of additional unemployment benefits is going to disappear, unless Congress acts.  Funnily enough, that could be the catalyst to get the employment data to start to improve significantly, if they let those benefits lapse.  But that is a question far above my pay grade.

The dollar feels stretched to the downside here, and any sense of an equity market correction could easily result in a rush to havens, including the greenback.

Good luck and stay safe