While much of the nation’s a wreck
The good news is there’s still Big Tech
Whose prices ne’er fall
Thus, keeping in thrall
Investors who wrote a blank check

One cannot but be impressed with the performance of the tech sector in US equity markets.  It seems that no matter what else happens anywhere in the world, a small group of companies has unearthed the secret to infinite value, or at least a never-ending rally in their share prices. Yesterday’s price action was instructive in that a group of just seven companies, all tech titans, added nearly $300 billion in value, which was greater than the entire NASDAQ’s 2.5% gain. While we all are happy to see equity markets continue to rally, it certainly is beginning to appear as though some of these valuations are unsustainable, especially if the V-shaped recovery doesn’t materialize. One other thing to consider about the values of these companies is that if there is a change in the White House, it is almost certain to bring with it significantly higher corporate taxes (39.6% anyone?), which will almost certainly result in a repricing of the future stream of earnings available to shareholders. But for now, clearly nothing matters but the fact that these companies are market darlings and are set to continue to rally…until they stop.

In Europe, those twenty plus nations
(Ahead of their summer vacations)
Have finally agreed
To help those in need
With billions in brand new donations

However, arguably the biggest story in the markets today is that the EU finally did agree to a spending plan to help those nations most severely impacted by the Covid recession. It was inevitable that this would be the result as the political imperative was too great for four smaller nations to prevent its completion. To hear the frugal four, though, is quite amusing. They seem to believe that their “principled” stand, where they each get a larger rebate from the general pool of funds (each is a net payer into the EU budget), and their demands that this is a one-time solution to an extraordinary event means that in the future, debt mutualization will not expand. If there is one thing that we know about government programs, it is that they always expand, and they never die. There is no such thing as a one-time program. Debt mutualization is now the standard in the EU, and one should expect nothing less. Redistribution from the North to the South of the continent is now a permanent feature.

The market reaction to this news is mostly what one would have expected. European equity markets have rallied, with those in Italy (+2.2%) and Spain (+1.9%) leading the way higher, although the strength is broad-based. As well, European government bond markets are also performing appropriately, with the havens seeing a modest rise in yields while the risk bonds, like Italian and Greek debt, falling as investors have greater assurances that they will now be repaid. After all, with debt mutualization, Greek and German debt are basically the same!

Finally, looking at the FX markets, we find the euro slightly softer on the session, having briefly traded higher, but now falling victim to what appears to be a buy the rumor, sell the news type event. But the euro has been a stellar performer for the past two months, rising 4.5% in that period as the market narrative has turned back to some previously discredited themes. Notably, we continue to hear a great deal about the dollar’s twin deficit issue and how that will undermine the greenback. In addition, given the ongoing risk rally, the idea of needing a safe haven currency, has simply faded from existence. In fact, this morning there is now talk that the euro, with its new solidarity, is really a haven asset. PPP models continue to point to the euro being undervalued at current levels with forecasts creeping ever higher. In fact, one large bank is out calling for 1.30 in the euro by the end of next year.

Of course, there is a great irony in the discussion of a stronger euro, the fact it is the absolute last thing Madame Lagarde and her ECB compatriots want (or need). After all, one of the key reasons for them to cut interest rates below zero was to undermine the euro in order to both import inflation and help European exporters become more price competitive. You can be sure that if the euro does start to break higher, we will hear a great deal more about the inappropriate price action of a rising euro. For now, all eyes are on 1.1495, which was the spike high seen in March, and which is currently serving as a resistance point for the technicians. A break there is likely to see a test of the 1.17-1.18 level before the end of the summer.

As to the dollar overall, it continues its recent weakening trend, with only a handful of currencies modestly softer and some decent moves the other way. For instance, Aussie is the top pick in the G10 this morning, rising 0.85%, as a combination of risk appetite and a short squeeze is doing the job nicely. But we are also seeing strength in NOK (+0.6%) and CAD (+0.5%), both of which are benefitting from oil’s rally today (WTI +2.8%). In the EMG space, it should be no surprise that RUB and ZAR (both +0.8%) are the leaders as the oil and commodity price rallies are clear supports. In fact, the bulk of this bloc is firmer this morning with only a handful of currencies (RON, CNY, SGD) in the red, and there just by a few basis points. Overall, it is fair to say the dollar is on its back foot again today.

With no data due today, and none of note released overnight, the FX market seems set to take its cues from the equity space and the broad risk themes. And it is pretty clear that the broad risk theme today is…buy more risk!

Herbert Stein, a very well-respected economist in the 1960’s was quoted as saying, “that which cannot continue, will not continue.” His point was that while exuberance may manifest itself periodically, it always ends when reality intrudes. Right now, it feels like risk assets, especially that formidable group of tech names, is completely disconnected with the economic reality and best-case prospects. The implication is this cannot go on. But that doesn’t mean it won’t go further before it ends. The narrative is risk assets are the thing to own, and as long as that is the case, the dollar is likely to remain under pressure.

Good luck and stay safe
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