Monthly Archives: November 2020

Post-Covid Themes

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With Thanksgiving now in the past
And Christmas approaching quite fast
The only thing clear
Through end of the year
Is dollar shorts have been amassed

For many, conviction is strong
That currencies, they need be long
The idea, it seems
Is post-Covid themes
Mean risk averse views are now wrong

Having been away for a week, the most interesting thing this morning is the rising conviction in the view that the dollar has much further to decline in 2021.  Much is made of the fact that since its Covid induced highs in March, the dollar has fallen by more than 12% vs the Dollar Index (DXY) which is basically the euro.  Of course, that is nothing compared to the recoveries seen by the commodity currencies like NOK (+33.2%), AUD (+27.6%) and NZD (+23.6%) over the same period.  Yet when viewed on a year-to-date basis, the movement is far less impressive, with NOK actually unchanged on the year, and the leader, SEK, higher by 10.8%.  It is also worth remembering that the euro has rallied by a relatively modest 6.9% thus far in 2020, hardly worthy of the term dollar collapse.

In addition, as I have written before, but given the growing dollar bearish sentiment, I feel worth repeating, is that in the broad scheme of things, the dollar is essentially right in the middle of its long-term trading range.  For instance, from the day the euro came into existence, January 1, 1999, the average daily FX rate, according to Bloomberg, has been 1.1999, almost exactly where it currently trades.  It has ranged from a low of 0.8230 in October 2000 to a high of 1.6038 the summer before the GFC hit.  The point is EURUSD at 1.20 is hardly unusual, neither can it be considered weak nor strong.

Unpacking the rationale, as best I understand it, for the dollar’s imminent decline, we see that a great deal of faith is put upon the idea of a continuing risk rally over the next months as the global economy recovers with the advent of the Covid vaccines that seem likely to be approved within weeks.  The sequence of events in mind is that the distribution of the vaccine will have the dual impact of dramatically reducing the Covid caseloads while simultaneously reinvigorating confidence in the population to resume pre-Covid activities like going out to restaurants, bars and the movies, as well as resuming their travel plans.  The ensuing burst of activity will result in a return to pre-Covid levels of economic activity and all will be right with the world.  (PS  pre-Covid economic activity was a desultory 1.5% GDP growth with low inflation that caused the central bank community to maintain ultra-low interest rates for a decade!)

Equity markets, which are seemingly already priced for this utopian existence, will continue to rally based on the never-ending stream of central bank liquidity…or is it based on the massive growth in earnings given the near certainty of higher taxes and higher interest rates in the future.  No, it can’t be the second view, as higher taxes and higher interest rates are traditionally equity negatives.  So perhaps, equity markets will continue to rally as the prospect of future growth will remain just close enough to seem real, but far enough away to discourage policymakers from changing the rules now.  Perhaps this is what is meant by the Goldilocks recovery.

Of course, while commodity markets have bought into the story hook, line and sinker, it must be recalled that they have been the greatest underperforming segment of markets for the past decade.  Since December 1, 2010, the Goldman Sachs Commodity Index (GSCI) has fallen 36.5%, while the S&P500 has rallied 191%.  My point is the fact that commodity markets are performing well with the prospects of incipient economic growth ought not be that surprising.

The fly in the ointment, however, is the bond market, where despite all the ink spilled regarding the reflation trade and the steepening of the US Treasury yield curve, 10-year Treasuries refuse to confirm the glowing views of the future. At least, while they may be agnostic on growth, there is certainly little concern over a rekindling of inflation, despite the earnest promises of every central banker in the world to stoke the fires and bring measured inflation back to their targets.  As I type this morning, 10-year Treasury yields are 0.85%, right in the middle of its range since the US election.  You remember that, the event that was to usher in the great reflation?

In the end, while sentiment has clearly been growing toward a stronger recovery next year, encouraging risk appetites in both G10 and, especially, EMG economies, as yet, the data has not matched expectations, and positioning remains based on hope rather than evidence.

Now a quick tour around today’s markets shows that the equity rally has paused, at the very least, with weakness in Asia (Nikkei -0.8%, Hang Seng -2.1%, Shanghai -0.5%) despite stronger than expected economic data from both Japan (IP +3.8%) and China (Mfg PMI 52.1, non-Mfg PMI 56.4).  European markets are also mostly in the red, although the DAX (+0.2%) is the exception to the rule.  However, the CAC (-0.4%) and FTSE 100 (-0.15%) have joined the rest of the continent lower despite positive comments regarding a Brexit deal being within reach this week.  US futures have a bit of gloom about themselves as well, with both DOW and SPX futures pointing to 0.5% declines at the open, although NASDAQ futures are little changed at this hour.

Surprisingly, despite the soft tone in the equity markets, European government bond yields are all edging higher, with Bunds (+1.6bps) pretty much defining the day’s activity as most other major markets are seeing similar moves, including Treasuries (+1.8 bps).  Commodity prices are under pressure with oil (-1.3%) and gold (-0.9%) both suffering although Bitcoin seems to be regaining its footing, rallying 2.3% this morning.

Finally, the dollar, is under a modicum of pressure this morning with G10 currencies mostly a bit firmer (NOK and SEK +0.4%) GBP (+0.3%), although AUD (-0.1%) seems to be getting nosebleeds as it approaches its highest level in two years.  Potentially, word that China has slapped more tariffs on Australian wines, as the acrimony between those two nations escalates, could be removing the rose-colored tint there.  Meanwhile, in the EMG bloc, there is a mix of activity, with some gainers (HUF +0.8%) and BRL (+0.65%), and some losers (ZAR -0.3%), KRW (-0.25%).  Broadly, the commodity focused currencies here are feeling a little pressure from the underperformance in oil and metals, while the CE4 are tracking the euro nicely.

It is an important data week, and we also hear from numerous central bankers.

Today Chicago PMI 59.0
Tuesday ISM Manufacturing 58.0
Construction Spending 0.8%
Wednesday ADP Employment 420K
Fed Beige Book
Thursday Initial Claims 765K
Continuing Claims 5.81M
ISM Services 57.6
Friday Nonfarm Payrolls 500K
Private Payrolls 608K
Manufacturing Payrolls 46K
Unemployment Rate 6.8%
Average Hourly Earnings 0.1% (4.2% Y/Y)
Average Weekly Hours 34.8
Trade Balance -$64.8B
Factory Orders 0.8%

Source: Bloomberg

In addition, we have seven Fed speakers this week, including most importantly, Chairman Powell’s testimony to the Senate Banking Committee tomorrow and the House Finance Panel on Wednesday.  We also hear from Madame Lagarde twice this week, and with the euro hovering just below 1.20, be prepared for her to mention that a too-strong euro is counterproductive.  You may recall in early September, the last time the euro was at these levels, that both she and Philip Lane, ECB Chief Economist, were quickly on the tape talking down the single currency.  Although since that time CNY has rallied strongly (+4%) thus removing some of the pressure on the ECB, there is still no way they want to see the euro rally sharply from here.

But do not be surprised to see the market test those euro highs today or tomorrow, if only to see the ECB response and pain threshold.  Clearly, momentum is against the greenback lately, and today is no exception, but I do not buy the dramatic decline story, if only because no other central bank will sit idly by and allow it.

Good luck and stay safe
Adf

Pandemic Support

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Til now the direction’s been clear
As Jay and Mnuchin did fear
If they didn’t spend
The US can’t mend
And things would degrade through next year

But now, unless there’s a breakthrough
It seems Treasury won’t renew
Pandemic support
Which likely will thwart
A rebound til late Twenty-Two

Just when you thought things couldn’t get more surprising, we wind up with a public disagreement between the US Treasury Secretary and the Federal Reserve Chair.  To date, Steve Mnuchin and Jay Powell have seemed to work pretty well together, and at the very least, were both on the same page.  Both recognized that the impact of the pandemic would be dramatic and there was no compunction by either to invent new ways to support both markets and the economy.  As well, both were appointed by the same president, and although their personal styles may be different, both seemed to have a single goal in mind, do whatever is necessary to maintain as much economic activity as possible.

Aah, but 2020 is unlike any year we have ever seen, especially when it comes to policy decisions.  The legalities of the alphabet soup of Fed programs (e.g. PMCCF, SMCCF, MMLF, etc.) require that they expire at the end of the year and must be renewed by the Treasury Department.  And in truth, this is a good policy as expiration dates on spending programs require continued debate as to their efficacy before renewal.  The thing is, given the rapid increase in covid infections and rapid increase in state economic restrictions and shutdowns, pretty much every economist and analyst agrees that all of these programs should continue until such time as the spread of the coronavirus has slowed or herd immunity has been achieved.  Certainly, every FOMC member has been vocal in the need for more fiscal stimulus as they know that their current toolkit is inadequate.  (Just yesterday we heard from both Loretta Mester and Robert Kaplan with exactly that message.)  But to a (wo)man, they have all explained that the Fed will continue to do whatever it can to help, and that means continuing with the current programs.

Into this mix comes the news that Secretary Mnuchin sent a letter to the Fed that they must return the funds made available to backstop some of the Fed’s lending programs, as they were no longer needed.  The Fed immediately responded by saying “the full suite” of programs should be maintained into 2021.

Let’s consider, for a moment, some of the programs and what they were designed to do.  For instance, the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility do seem superfluous at this stage.  After all, more than $1.9 trillion of new corporate debt has been issued so far in 2020 and the Fed has purchased a total of $45.8 billion all year, just 2.4%, mostly through ETF’s.  It seems apparent that companies are not having any difficulty accessing financing, at very low rates, in the markets directly.  In the Municipal space, the Fed has only bought $16.5 billion while more than $250 billion has been successfully issued year to date.  Mnuchin’s point is, return the unused funds and deploy them elsewhere, perhaps as part of the widely demanded fiscal policy support.  The other side of that coin, though, is the idea that the reason the market’s have been able to support all that issuance is because the Fed backstop is in place, and if it is removed, then markets will react negatively.

In fairness, both sides have a point here, and perhaps the most surprising outcome is the public nature of the spat.  Historically, these two agencies work closely together, especially during difficult times.  But as I said before, 2020 is unlike any time we have seen in our lifetimes.  There is one other potential driver of this dissension, and that could be that politically, the Administration is trying to get Congress to act on a new stimulus plan quickly by threatening to remove some of the previous stimulus.  However, whatever the rationale, it clearly has the market on edge, interrupting the good times, although not yet resulting in a significant risk-off outcome.

If this disagreement is not resolved before the next FOMC meeting in three weeks’ time, the market will be looking for the Fed to expand its stimulus measures in some manner, either by increasing QE purchases or by purchasing longer tenor bonds, thus weighing on the back end of the curve as well as the front.  And for our purposes, meaning in the FX context, that would be significant, as either of those actions are likely to see a weaker dollar in response.  Remember, while no other central bank is keen to see the dollar weaken vs. their own currency, as long as CNY continues to outperform all, further dollar weakness vs. the euro, yen, pound, et al, is very much in the cards.

So, with that as our backdrop, markets today don’t really know what to do and are, at this point, mixed to slightly higher.  Asia, overnight, saw further weakness in the Nikkei (-0.4%), but both the Hang Seng and Shanghai exchanges gained a similar amount.  European bourses have slowly edged higher to the point where the CAC, DAX and FTSE 100 are all 0.5% higher on the day, although US futures are either side of unchanged as traders try to figure out the ultimate impact of the spat.  Bonds are mixed with Treasury yields higher by 1 basis point, but European yields generally lower by the same amount this morning.  Of course, a 1 basis point move is hardly indicative of a directional preference.

Both gold and oil are essentially flat on the day, and the dollar can best be described as mixed, although it is starting to soften a bit.  In the G10 space, NZD (+0.45%) leads the way with the rest of the commodity bloc (AUD, NOK, CAD) all higher by smaller amounts.  Meanwhile, the havens are under a bit of pressure, but only a bit, with JPY and CHF both softer by just (-0.1%).  EMG currencies have seen a similar performance as most Asian currencies strengthened overnight, but by small amounts, in the 0.2%-0.3% range.  Meanwhile, the CE4 were following the euro, which had been lower most of the evening but is now back toward flat, as are the CE4.  And LATAM currencies, as they open, are edging slightly higher.  But overall, while there is a softening tone to the dollar, it is modest at best.

On the data front, there is none to be released in the US today, although early this morning we learned that UK Retail Sales were a bit firmer than expected while Italian Industrial activity (Sales and Orders) was much weaker than last month.  On the speaker front, four more Fed speakers are on tap, but they all simply repeat the same mantra, more fiscal spending, although now they will clearly include, don’t end the current programs.

For the day, given it is the Friday leading into Thanksgiving week, I expect modest activity and limited movement.  However, if this spat continues and the Treasury is still planning on ending programs in December, I expect the Fed will step in to do more come December, and that will be a distinct dollar negative.

One last thing, I will be on vacation all of next week, so there will be no poetry until November 30.

Good luck, good weekend, stay safe and have a wonderful holiday
Adf

Appalled

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As Covid continues to spread
In Europe, it’s come to a head
Relief has been stalled
‘Cause most are appalled
That Hungary, old norms, has shred

It seems like only yesterday when the market was talking about the shape of future monetary support by the ECB and how that would fit with the EU’s fiscal package and help the continent recover from the Covid induced recession.  While current lockdowns throughout Europe are painful, with a vaccine on the horizon and the historic agreement on joint liability, the future of Europe seemed bright and adding to risk profiles was seen as appropriate.  And perhaps that is because it was only yesterday when that was the market’s theme.  At least yesterday morning’s theme.  But as Dinah Washington first sang to us in 1959, “What a difference a day makes!”  This morning, the optimists have lost the spring in their step as risk appetite has waned.  It seems that the news that Hungary and Poland are digging in their heels with respect to the EU rescue package has suddenly been recognized as a problem.

For those of you who thought that the only place where there was political discord was in the US, that has never been the case.  The EU has also seen the type of political division seen here; it just takes a different form in Europe.  Rather than red and blue states, Europe has red and blue countries, with Hungary and Poland being the reddest of them all, at least in US terminology.  The governments of both these nations have objected to much of the EU agenda since 2015 and the flood of refugees entering the continent from the Middle East and Northern Africa in the wake of several civil wars ongoing then (and still).  It seems the folks in Brussels wanted to dictate how many refugees each nation in the EU needed to absorb, and given both these country’s geographic location, amongst the first countries any refugee from the Levant would enter, they were instructed to take a disproportionate number.  At least, disproportionate in their eyes.  And that didn’t sit well with the citizenship in both countries, who then elected nationalist/populist leadership.  Since that time, both nations have sought to roll back numerous EU edicts regarding various issues like the judiciary and immigration.  This has caused serious griping in Brussels as well as in Budapest and Warsaw.

Fast forward to the current situation, where the EU is seeking to pass their €1.8 trillion Covid relief package (their version of our CARES package from March).  The problem is that EU law states support must be unanimous, and these two nations are fighting back against a provision in the text about recipients of aid following the “rule of law”.  That innocuous sounding statement is code for the EU leadership’s insistence that laws restricting immigration, or an independent judiciary are verboten.  The upshot is the relief package is written so that any nation that does not follow the “rule of law” will not be entitled to any funding.  Naturally, Hungary and Poland want the money, but they, as yet, have been unwilling to give ground on the issue, hence the stalemate.  Now, like most political stand-offs, this one had seemed likely to be resolved before it got too heated.  However, as of this morning, it seems market participants are beginning to question if a package will get approved.  And there is another issue in the background as well, Brexit.  By that, I mean with the UK just about gone from the EU, if two other nations were to opt out of the bloc, what would that do to the EU as a whole, as well as to confidence in the political leadership across the continent.  This is not to say that either Hungary or Poland is on the way out.  It is merely a recognition that the post Brexit EU will not be all sunshine and rainbows.

And apparently, that has been enough for investors to decide that profit-taking is a prudent move.  Which leads us to this morning’s risk-off session.  Despite more forceful comments from Madame Lagarde, and news that there is now a third vaccine that has proven effective, it seems that fear is creeping back into the picture.  We saw it late in the US session yesterday, with all three major indices closing about 1% lower and on session lows.  It was followed in Asia by the Nikkei (-0.35%) falling for a third consecutive session and the Hang Seng (-0.7%).  Shanghai (+0.5%), however, broke the mold as the Chinese government’s ability to issue euro-denominated debt at negative yields in the 5-year added to recent enthusiasm that China’s growth story remains unimpinged by Covid.

Turning to Europe, which is, after all, the epicenter of today’s angst, it is no surprise that all markets are in the red, with the DAX, CAC and FTSE 100 all lower by roughly 1.0%.  As to the US futures complex, larger losses earlier have been pared, but we are still looking at declines on the order of 0.25%-0.4%.

Bond yields are generally lower, as expected, with Treasuries down by 1.5bps, a similar move to both Bunds and French OATS.  In fact, the only European bond market in the red is Greece, where yields have backed up by 4bps.  In the meantime, oil (WTI -1.0%) and gold (-0.5%) are leading the entire commodity bloc lower.

In the FX markets, the dollar reigns supreme this morning, higher against all its G10 counterparts.  That said, the magnitude of movement has been modest with AUD (-0.4%), NZD (-0.4%) and SEK (-0.3%) the leading decliners.  Clearly, pressure on commodities is undermining the former two, while SEK tends to move in the same direction as the bloc, just in larger increments.  (As an aside, USDSEK option volatility has consistently traded at a 2.5% premium to EURUSD volatility for the past eight months.)

In the emerging markets, a space that has received a lot of positive press of late, only one currency has rallied vs. the dollar this morning, TRY (+1.4%) after the Turkish central bank raised short-term interest rates by 4.75% to help support the currency as well as fight inflation, which is running at nearly 12% there.  But the rest of the bloc is weaker, led by KRW (-1.0%) and IDR (-0.6%), with even CNY (-0.4%) suffering on the day.  The won sold off after FinMin Hong Nam-ki said that they could step in to stabilize (read sell won) the market at “any time”.  A clear threat to speculators, and one well-heeded, at least today.  The rupiah fell after the central bank there cut rates by 25 basis points in a surprise move, as the country continues to try to cope with rising infections and thus is willing to add further support.  As to CNY, given the spectacular run it has had lately, a modest pullback needs no explanation.

Data has been sparse overnight, with only Australian job growth a bit higher than expected after the Victoria lockdown was eased.  This morning brings a few key readings here starting with Initial Claims (exp 700K) and Continuing Claims (6.4M).  Also, at 8:30 we see Philly Fed (23.0) then Leading Indicators (+0.7%) and Existing Home Sales (6.47M) at 10:00am.  While the Initial Claims numbers remain paramount, recall that Empire Manufacturing on Monday was much weaker than expected, so we may see clues as to just how Q4 is turning out.  For what it’s worth, the Atlanta Fed’s GDPNow forecast is currently sitting at 5.6% for Q4, so still a pretty positive outlook.

Two more Fed speakers today are likely to continue to tell us that we need more fiscal stimulus but that they have plenty of ammo left.  And that’s really it.  The early fear seems to be abating somewhat as I finish just past 7am.  As such, it wouldn’t be that surprising to see a late day equity rally and the dollar cede its gains.  But absent some other piece of news, large movement seems unlikely.

Good luck and stay safe
Adf

Growth’s Embers

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Said Madame Lagarde, come December
There’s something you all must remember
It’s not ‘bout the size
But how we comprise
Our policy to fan growth’s embers

For a consensus driven institution, the ECB is, apparently, finding it pretty hard to arrive at a consensus on what the promised policy expansion should contain.  You may recall that at their meeting in late October, the ECB appeared pretty explicit that they would be increasing monetary support at the upcoming meeting.  The narrative quickly developed that another €500 billion of PEPP purchases would be appropriate, although there were some ideas that the ECB could expand the APP, their original QE program.  With this in mind, it is crucial to remember that markets typically take the most simplistic approach toward any analysis, and so respond to numbers.  Subtleties are either misunderstood or ignored by the trading community as they require far too much time to appreciate before responding.  After all, it is much easier for algorithms (and traders) to be programmed to buy on a large number and sell on a small number than to dig into the meaning of the words offered up by the ECB.

Keeping this in mind, it is quite interesting that recently, we have started to hear from numerous ECB members that the size of the program adjustments are not as important as their nature.  (Now where have we heard that before?)   Just this morning, Madame Lagarde herself was quoted as follows, “What is really important is that we make sure that the financing conditions are stable, are conducive to economic recovery as it comes.”  She also emphasized that “[market participants must] not only know that the level of financing is going to be there, but that it will be available for a period for time that will last long enough.”  Reading between the lines, this sounds like the mooted €500 billion expansion that has been the market baseline premise since the October meeting, is not going to be realized.  Looking back over the past week, comments from numerous other ECB members, including Chief Economist Philip Lane, as well as Finland’s Olli Rehn, Belgium’s Yves Mersch and Spain’s Pablo Hernandez de Cos have also highlighted that size doesn’t matter, but instead it is the nature and duration of the program that is important.

What are we to make of this change in emphasis?  Initially there are two conclusions that can be drawn.  First, some of the more hawkish members of the ECB; Germany, Austria and the Netherlands most likely, have made it clear that they don’t want to see an unlimited amount of asset purchases as those three nations still believe that central bank financing of government spending is a bad idea.  Thus, the fact that central bankers from more dovish countries are trying to temper expectations is playing to the hawks.

But there is another, more intriguing possibility, and that is that the ECB, who has been terrified of an overly strong euro, has realized that the Chinese renminbi’s consistent strength vs. the dollar (+8.6% since late May) has now been sufficient to offset the euro’s appreciation since that same time.  Essentially, the euro saw a very sharp rise from May through August but has been biding its time since then while the renminbi has been steadily climbing almost every day.  The point is, on a trade-weighted basis, the euro is no longer nearly as strong as it was in August, and so if EURUSD rises a bit further, the ECB may not be too troubled.  This is not to imply that they will be happy to see the euro go screaming up through 1.25 anytime soon, but if it trades to 1.20 or 1.21, it will probably not be ringing alarm bells.

Putting it all together leads me to believe that the ECB no longer is feeling quite as stressed about the euro’s strength vs. the dollar this summer, and so does not feel compelled to increase QE by that much in order to prevent a further rise.  The $2.2 trillion question (that is roughly the amount of EURUSD transacted each day according to the BIS) is, if the ECB disappoints the narrative, despite their claims, and the euro rallies sharply, what will they do then?  Poor Christine already has enough trouble speaking to the market effectively.  If this message gets muddled, it will really create problems, as well as the chance for an emergency program early next year.

With that in mind, let’s look at today’s activities.  After a modest sell-off in the US yesterday, Asia had another mixed session with the Nikkei (-1.1%) falling for a second day after its long run of gains, while the Hang Seng (+0.5%) and Shanghai (+0.2%) both finished with small pluses.  The European markets are all green, but the movement has been de minimis, with the DAX and CAC (+0.2% each) essentially leading the way while the FTSE 100 is simply flat.  Certainly, there is no massive risk-on attitude apparent.  Finally, US futures are all modestly higher at this hour, but 0.2% is a good description here as well.

Bond markets are also fairly muted this morning with Treasury yields essentially unchanged, having retraced half of the vaccine related movement of the past week.  European markets are similarly little changed, except for Greek bonds, where yields have fallen nearly 5 basis points.  But the rest of the curve is within one basis point of yesterday’s levels.  Again, it is hard to discern much risk attitude here.

Oil prices have pushed higher by 1% this morning but have not yet reclaimed the heights seen in the wake of the vaccine announcement.  Gold, meanwhile, has been wandering aimlessly of late, although there is a growing hubbub about Bitcoin, which has traded to $18k this morning.

Finally, to the dollar, which is clearly under pressure virtually across the board this morning.  In the G10 space, NOK (+0.55%) is the leader, following oil prices higher as ongoing enthusiasm over a vaccine driven recovery continues to be felt.  But we are seeing gains in SEK (+0.4%), once again showing its deserved status as a high beta currency, and JPY (+0.2%), which has recouped more than half of its very sharp decline seen last Monday in the wake of the first vaccine announcement.  As this doesn’t appear to be a risk-off scenario, I would attribute the yen’s gains more to the dollar’s broad weakness than anything else.  However, do not be surprised if we test, and this time break, 103.00 before too long.

Emerging market currencies are also broadly stronger, but the movement has been fairly contained.  Leading the pack is CLP (+0.7%) as copper prices are benefitting from the vaccine enthusiasm, as well as RUB (+0.6%) on the back of oil’s strength.  After that, the gains are far less impressive, but they are evident across all three major blocs.  On the downside, today’s notable loser is THB (-0.5%) as the central bank there commented on the baht’s recent strength (+3.0% in the past two weeks) and is set to unveil a package to rein in that strength.

On the data front, yesterday saw weaker than expected Retail Sales numbers here in the States, although that didn’t have much impact on things.  Overnight we have seen CPI data from Europe, which was largely in line with expectations and remains right near 0.0%.  This morning brings Housing Starts (exp 1460K) and Building Permits (1567K), which also seem unlikely to have much impact.  Four more Fed speakers are on the docket, but unlike the ECB, there doesn’t seem to be much disagreement on what needs to be done in the US (more fiscal stimulus, please!)

And that’s it really.  The dollar’s weakness feels a bit overdone in the very short term, but with this new attitude by the ECB, if I am correct, an eventual grind toward 1.21 seems possible.  However, do not mistake that for a dollar collapse in any way, shape or form.

Good luck and stay safe
Adf

More Money They’ll Print

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While stock markets make all-time highs
The world’s central banks still advise
More money they’ll print
In case there’s a hint
That prices will simply not rise

In a chicken and egg type question, it is worth asking; is the fact that equity markets continue to rally (yet another all-time high was recorded yesterday, this time by the Dow) despite the fact that economies worldwide remain in chaos and operating at a fraction of their capacity, as governments impose another wave of lockdowns throughout Europe, the UK and many US states, logical?  Obviously, the link between those dichotomous outcomes is the support provided by the central banking community.  Perhaps the way to frame the question is, if markets have already seen past the end of the pandemic, and are willing to fund the business community right now, why do central banks feel they need to, not merely continue with their programs, but promise to increase them going forward?

This was made clear, yet again, when Fed Vice-Chair, Richard Clarida, explained that the FOMC is carefully evaluating the current situation and will not hesitate to use all available tools to help support the economy.  The punditry sees this as a code for an increase in the size of the asset purchase program, from the current $120 billion each month (split $80 billion Treasuries and $40 billion mortgages) to as much as $160 billion each month, with the new money focused on Treasuries.  At the same time, ECB Chief Economist, Philip Lane, explained that the central bank will provide enough monetary stimulus to make sure governments, companies and households have access to cheap credit throughout the coronavirus crisis.

And perhaps, that is the crux of the problem we face.  Despite investor optimism that the future is bright, and despite central banks’ proven inability to get funding to those most in need, namely individual households, those same central banks continue to do the only thing they know how to do, print more money, and by extension fund governments and large companies, who already have access to funding.  As the saying goes, the rich get richer.

The cycle goes as follows: central banks cut interest rates => investors move out the risk curve seeking returns => corporations and governments issue more debt at cheaper levels => an excess (and ultimately unsustainable) amount of debt outstanding.  Currently, that number, globally, is approaching 400% of GDP, and on current trends, has further to go.  The problem is, repayment of this debt can only be achieved in one of two ways, realistically, neither of which will be pleasant.  Either, inflation actually begins to rise sufficiently to diminish the real value of the debt or we get to a debt jubilee, where significant portions are simply written off.

If you were ever wondering why central banks are desperate for higher inflation, this is your answer.  While they are mostly economists, they still recognize that inflation is exactly the kind of debt destructive force necessary to eventually balance the books.  It will take time, even if they can manage the rate of inflation, but their firmly held belief is if they could just get inflation percolating, all that debt would become less of a problem.  At least for the debtors. Creditors may not feel the same excitement.

On the other hand, the debt jubilee idea is being bandied about in many forms these days, with the latest being the cancellation of student debt outstanding.  That’s $1.6 trillion that could be dissolved with the signing of a law.  Now, who would pay for that?  Well, I assure you it is not a free lunch.  In fact, the case could be made that it is this type of action that will lead to the central banks’ desired inflation outcome.  Consider, wiping out that debt would leave $1.6 trillion in the economy with no corresponding liabilities.  That’s a lot of spending power which would suddenly be used to chase after a still restricted supply of goods and services.  And that is just one small segment of the $100’s of trillions of dollars of debt outstanding.  The point is, there are still many hard decisions yet to be made and there are going to be winners and losers based on those decisions.  Covid-19 did not cause these issues to arise, it merely served as a catalyst to make them more widely known, and potentially, will push us toward the endgame.  Be prepared!

But that is all just background information to help us try to understand market activity a bit better.  Instead, let’s take a look at the market today, where yesterday’s risk appetite seems to have developed a bit of indigestion.  Overnight saw a mixed equity picture (Nikkei +0.4%, Hang Seng +0.1%, Shanghai -0.2%) with the magnitude of movements more muted than recent activity.  Europe, on the other hand, has been largely in the red (DAX -0.35%, CAC -0.3%, FTSE -1.15%) as apparently Mr Lane’s comments were not seen as supportive enough, or, more likely, markets are simply overbought after some enormous runs this month, and are seeing a bit of profit taking.  US futures are mixed at this point, with the DOW and S&P both down -0.5%, while the NASDAQ is up about 0.3%.  The biggest stock market story is S&P’s decision to add Tesla to the S&P500 index starting next month, which has helped goose the stock higher by another 10%.

Bond markets this morning are a tale of three regions.  Asian hours saw Australian and New Zealand bonds fall sharply with 10-year yields rising about 7 basis points, as the RBA’s YCC in the 3-year space is starting to really distort markets there.  However, in Europe, we are seeing a very modest bond rally, with yields slightly softer, about 1 basis point throughout the continent, and Treasuries have seen yields slip 1.5 basis points so far in the session. Clearly, a bit of risk-off attitude here.

FX markets, however, are not viewing the world quite the same way as the dollar, at least vs. its G10 counterparts, is somewhat softer, although has seen a more mixed session vs. EMG currencies.  Leading the way in the G10 is GBP (+0.5%) as stories make the rounds that a Brexit deal will be agreed next week.  Now, they are just stories, with no official comments, but that is the current driver.  Next in line is JPY (+0.3%) which perhaps we can attribute to a risk-off attitude, especially as CHF (+0.25%) is moving the same way.  As to the rest of the bloc, gains have been much smaller, and there has been absolutely zero data released this morning.

In the EMG bloc, EEMEA currencies have been the weak spot, with HUF (-0.5%) the worst performer, although weakness in PLN (-0.3%) and RUB (-0.25%) is also clear.  This story has to do with the Hungarian and Polish vetoes of the EU budget and virus recovery fund, as they will not accept the rule of law conditions attached by Brussels.  You may have heard about the concerns Brussels has over these two nations move toward a more nationalist viewpoint on many issues like immigration and judicial framework, something Brussels abhors.  On the positive side, BRL (+0.5%) has opened strongly, and CNY (+0.45%) led the Asian bloc higher overnight.  The China story continues to focus on the apparent strength of their economic rebound as well as the fact that interest rates there are substantially higher than elsewhere in the world and drawing in significant amounts of investor capital.  As to BRL, it seems the central bank has hinted they will be increasing the amount of dollars available to the market, thus adding to pressure on the dollar.

On the data front, yesterday saw a weaker than expected Empire Mfg number, but this morning is really the week’s big number, Retail Sales (exp 0.5%, 0.6% ex autos) as well as IP (1.0%) and Capacity Utilization (72.3%) a little later. On the Fed front, we have Chairman Powell speaking at 1:00, but not a speech, part of a panel, as well as another five Fed members on the tape at 3:00.  However, I anticipate the only thing we will learn is that the entire group will back up Vice-Chair Clarida regarding additional actions.

Despite the lack of risk appetite, the dollar is on its back foot this morning.  Ironically, I expect that we will see a rebound in risk appetite, rather than a rebound in the dollar as the session unfolds.

Good luck and stay safe
Adf

Cloaked in Fog

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***Moderna vaccine indicated at 94.5% effective** – 6:56am

The rebound in growth
Set records. But the future
Remains cloaked in fog

Similar to what we have seen in every major economy, Q3 GDP growth in Japan recorded the highest ever rate since statistics were first collected and calculated in 1980.  The 21.4% annualized growth in Q3 (5.0% Q/Q), however, was substantially below the levels seen in the US (7.5% Q/Q), France (18.2% Q/Q), Germany (8.2% Q/Q) and the UK (15.5%).  Perhaps the bigger concern for Japan is the fact that it has recouped barely half the economic losses derived from the onset of Covid-19.  And adding to that concern is the recent resurgence in Covid cases, both in Japan and its major export markets, means that Q4 growth is unlikely to continue this trend, and could very well fall back into negative territory, depending on just how long shutdowns are in place around the world.

Investors, however, embraced the news (or embraced some news if not this) as the Nikkei continued its recent rally, rising 2.05% overnight amidst an overall risk-on setting.  In fact, since the close on October 30, the Nikkei has rallied nearly 13% despite relatively unimpressive data.  Not only that, given the BOJ is already at max support, it is unclear what else they can be expected to do to support the economy.  And yet, the equity market would have you believe the future is bright!  The one market not participating in this is FX, where the yen remains unchanged on the session, seemingly unable to decline despite the risk rally, but unable to advance in a weak dollar environment.

As calendar pages keep turning
There’s something that is quite concerning
The Brexit morass
Has reached an impasse
With neither side, for a deal, yearning

While there is no question that deals like the one currently needed to achieve a smooth Brexit on December 31st are always pushed off until there is no more time to delay, it certainly appears that we are getting awfully close to that time.  The big news last week was that Dominic Cummings, one of PM Johnson’s key advisors and a major architect of the entire Brexit campaign, resigned from his post.  Pundits immediately expected the UK to soften their position on state aid, which along with fishing rights for EU (mainly French) fleets are the two big issues remaining to be sorted.  But so far, that is not the case, with the UK’s chief negotiator, David Frost, explaining today that the UK “will not be changing” their positions as the next round of negotiations begins in Brussels.  And yet, markets remain entirely sanguine about the results, clearly expecting a deal to be reached and approved in time.  This is evident in the fact that the pound has actually rallied slightly today, 0.1%, and remains well-ensconced in its recent uptrend.  Similarly, the FTSE 100 continues its recent rally, rising 0.7% and is 14% higher than its close at the end of October.  Gilt yields?  Essentially unchanged on the day at 0.34%.  The point is, there is very little concern that a hard Brexit is in our future.  Either that, or the market is completely convinced that if one comes, the BOE will be able to do something about it. FWIW, the latter seems a bad bet.

Ultimately, the story of today’s session is that risk is a wonderful thing, and those who seek to manage risk or exhibit prudence with their positioning will be left behind again.  In the growth vs. value debate, value still has no value, it’s all about growth.  As an aside, perhaps economist Herbert Stein said it best with his observation now known as Stein’s Law; “If something cannot go on forever, it will stop.”  Bull markets cannot go on forever, so beware!

But they continue this morning with risk everywhere rallying.  Elsewhere in Asia, the Hang Seng rose 0.9% and Shanghai 1.1% after Chinese data showed IP slightly better than expected in October (6.9% Y/Y) although Retail Sales disappointed at 4.3% (exp 5.0%).  However, not only did equity markets there rally, so did the renminbi, rising a further 0.35% overnight and back to its strongest level since June 2018.

In fact, even before the Moderna vaccine news hit the tape, equities were all in the green in Europe (DAX (+0.5%, CAC +1.2%) and US futures were jumping (DOW +1.0%, SPX +0.7%, NASDAQ +0.7%), and they have risen further in the wake of the headline.  Perhaps everything is rosy and we are set to return to some sense of normalcy.  Of course, if that’s the case, will central banks worldwide still need to provide so much support?  And if they don’t provide that support, will markets be able to continue to rally on their own?  Just something to consider.

But at this time, the good vibes are everywhere, with oil markets (+2.5%) encouraged by the idea that the return to normal lies just around the corner, while gold, which had been higher earlier, seems no longer to be necessary in this brave new world, and has fallen 0.8% on the day (1% since the headline.)

Meanwhile, FX markets are in full risk-on mode.  In the G10 bloc, NOK (+0.9%) is the leading gainer, benefitting from the combination of overall risk appetite and the rise in oil prices.  After that, there is a group of commodity currencies (AUD, NZD and CAD all +0.4%) rising on the back of stronger commodity prices.  The euro and pound have both edged higher by 0.1%, and in the wake of the Moderna news, the yen has actually fallen back, (-0.3%), with risk metrics clearly dominating the dollar story now.

In the EMG bloc, BRL has opened much stronger (+1.5%) and we are seeing strength in the commodity focused currencies here as well; RUB (+1.25%), MXN (+1.1%), ZAR (+1.0%).  The rest of the bloc, excepting the Turkish lira (-1.0%) which remains beholden to the inconsistencies of Erdogan’s policies, is also generally firmer but not quite to the same extent.  However, the entire story is risk is ON.

On the data front, Retail Sales dominate the week,:

Today Empire Manufacturing 13.8
Tuesday Retail Sales 0.5%
-ex autos 0.6%
IP 1.0%
Capacity Utilization 72.3%
Business Inventories 0.6%
Wednesday Housing Starts 1455K
Building Permits 1567K
Thursday Initial Claims 700K
Continuing Claims 6.4M
Philly Fed 22.0
Leading Indicators 0.7%
Existing Home Sales 6.45M

Source: Bloomberg

But if the risk appetite is going to be as strong as this morning indicates, none of the data is going to matter.  Nor will anything that the dozen Fed speakers upcoming this week have to say.  Instead, this is all about the vaccine, growth and FOMO.  In this environment, the dollar is likely to remain under modest pressure, but at the end of the day, there is no reason to believe it will decline sharply.

Good luck and stay safe
Adf

Each of them Dreads

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The word from three central bank heads
Was something that each of them dreads
Is failing to let
Inflation beset
Their nations, thus tightening spreads

Instead, each one promised that they
Won’t tighten till some future day
When ‘flation is soaring
And folks are imploring
They stop prices running away

As we come to the end of the week, on a Friday the 13th no less, investors continue to be encouraged by the central bank community.  Yesterday, at an ECB sponsored forum, the heads of the three major central banks, Fed Chairman Jerome Powell, ECB President Christine Lagarde and BOE Governor Andrew Bailey, all explained that their greatest fear was that the second wave of Covid would force extended shutdowns across their economies and more permanent scarring as unemployment rose and the skills of those who couldn’t find a job diminished.  The upshot was that all three essentially committed to displaying patience with regard to tightening policy at such time in the future as inflation starts to return.  In other words, measured inflation will need to be really jumping before any of these three, and by extension most other central bankers, will consider a change in the current policy stance.

Forgetting for a moment, the fact that this means support for asset prices will remain a permanent feature, let us consider the pros and cons of this policy stance.  On the one hand, especially given the central banking community’s woeful forecasting record, waiting for confirmation of a condition before responding means they are far less likely to inadvertently stifle a recovery.  On the other hand, this means central banks are promising to become completely reactive, waiting for the whites of inflation’s eyes, as it were, and therefore will be sacrificing their ability to manage expectations.  In essence, it almost seems like they are dismantling one of the major tools in their toolkits, forward guidance.  Or perhaps, they are not dismantling it, but rather they are changing its nature.

Currently, forward guidance consists of their comments/promises of policy maintenance for an uncertain, but extended period of time.  For instance, the Fed’s forecasts indicate interest rates will remain at current levels through 2023.  (Remember Powell’s comment, “we’re not even thinking about thinking about raising rates.”)  But what if inflation were to start to rise significantly before then?  Does the current guidance preclude them from raising rates sooner?  That is unclear, and I would hope not, but broken promises by central banks are also not good policy.  However, if the new forward guidance is metric based, for instance, we won’t adjust policy until inflation is firmly above 2.0% for a period of time, then all they can do is sit back and watch the data, waiting for the economy to reach those milestones, before acting.  The problem for them here is that inflation has a way of getting out of hand and could require quite severe policy medicine to tame it.  Remember what it took for Paul Volcker as Fed Chair back in the early 1980’s.

My observation is that, as with the initiation of forward guidance, this is a policy that is much easier to start than to unwind, and either it will become a permanent feature of monetary policy (a distinct possibility) or the unfortunate soul who is Fed Chair when it needs to be altered will be roasted alive.  In the meantime, what we know is that central banks around the world are extremely unlikely to tighten policy for many years to come.  We have heard that from the BOJ, the RBA, and the RBNZ as well as the big three.  All told, one could make the case that interest rates have found their new, permanent level.

And with that in mind, let us tour market activity this Friday morning.  Equities in Asia followed from Wall Street’s disappointing performance yesterday and all sold off.  The Nikkei (-0.5%) fell for only the second time in the past two weeks.  Meanwhile, after President Trump signed an executive order preventing US investors from supporting companies owned or controlled by the PLA (China’s armed forces), equities in HK (Hang Seng -0.1%) and Shanghai (-0.9%) both fell as well.  The story in Europe is less clear, with some modest strength (DAX +0.2%), CAC (+0.3%) but also some weakness (FTSE -0.5%).  I would blame the latter on further disruption in the UK government (resignation of a high ranking minister, Dominic cummings) and a fading hope on a Brexit deal, but then the pound is higher, so that doesn’t seem right either.

Bond markets, which all rallied sharply yesterday, are continuing that price action, albeit at a more modest pace, with all European markets showing yield declines of between one and two basis points, although Treasuries are essentially unchanged right now.  Of course, Treasuries had the biggest rally yesterday.

Oil is softer (WTI – 1.0%) and gold is a touch firmer (+0.2%) although the latter seems clearly to have found significant support a bit lower than here.  As to the dollar, on the whole it is softer, but not terribly so.  For instance, GBP (+0.3%) is the leading gainer, with AUD (+0.2%) next on the list, but those are hardly impressive moves.  While the bulk of this bloc are firmer, SEK (-0.4%) has fallen on what appears to be a combination of position adjustments and bets on the future direction of the NOKSEK cross.  As to the EMG bloc, there are more gainers than losers, but MXN (+0.3%) is the biggest positive mover, which seems to be a hangover from Banxico’s surprise decision yesterday afternoon, to leave the overnight rate at 4.25% while the market was anticipating a 25-basis point reduction.  On the downside, CLP (-0.95%) is the worst performer, as investors appear concerned that there will be further financial policy adjustments that hinder the long-term opportunity in the country.

On the data front, overnight we saw Eurozone Q3 GDP released at 12.6% Q/Q (-4.4% Y/Y), a tick worse than expectations but it is hard to imply that had an impact of any sort on the markets.  In the US, yesterday saw a modestly better outcome in Initial Claims, and CPI was actually 0.1% softer than expected (helping the bond rally). This morning brings PPI (exp 0.4%, 1.2% Y/Y), about which nobody cares given we have seen CPI already, and then Michigan Sentiment (82.0) at 10:00.  We have two Fed speakers on the docket, Williams early, and then James Bullard.  But given the unanimity of the last vote, and the fact that we just heard from Chairman Powell, it would be a huge surprise to hear something new from either of them.

So, as we head into the weekend, with the dollar having been strong all week, a little further softness would not be a big surprise.  However, there is no reason to believe that there will be a significant move in either direction before we log off for the weekend.

Good luck, good weekend and stay safe
Adf

Electees Are Concerned

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In England and Scotland and Wales
The third quarter saw rising sales
But this quarter will
Repeat the standstill
Of Q2, with different details

In fact, worldwide what we have learned
(And why electees are concerned)
Is policy choices
That help certain voices
By others, are frequently spurned

Markets, writ large, continue to seek the next strong narrative to help generate enthusiasm for the next big move.  But for now, as we are past the ‘Blue wave is good’, and we are past ‘gridlock is good’, and we are past ‘the vaccine is here’, there seems precious little for investors to anticipate.  At least with any specificity.  And that is the key to a compelling narrative, it needs to have a plausible story, a rationale behind that story for the directional movement, but perhaps most importantly, it has to have a target that can be realized.  Whether that target is an announcement, a deadline or long-awaited policy speech, it needs an endgame.  And right now, there is no obvious endgame to drive the narrative.  With that in mind, it should not be very surprising that markets have lost their way.

So, let’s consider what we do know and try to anticipate potential impacts.  The UK Q3 GDP data this morning was of a piece with the US release two weeks ago, as well as what we saw for all the Eurozone nations that have reported, and what we are likely to see from Japan Sunday night; record breaking growth in the quarter, but growth insufficient to make up for the losses in Q2.  Of greater concern for governments everywhere is that Q4 is going to see a dramatic slowing, and in some nations, a return to negative output, due to the resumption of lockdowns throughout Europe as well as in some major US cities.

Economists and analysts seem to have an interesting take on this, essentially explaining that if Q4 turns out worse than previously forecast, it just means that Q1 of next year will be better.  No biggie!  But, of course, that is absurd, especially given the severity of the Covid recession’s impacts already.  After all, the loss of millions of small businesses around the world, and the concurrent loss of employment by those businesses workers is not something that can be quickly reversed.  While in the long term, entrepreneurs will almost certainly restart new businesses, there is a significant time lag between the two events.  And ironically, governments tend to make starting businesses very hard with regulations and licensing fees imposed on the would-be entrepreneur, thus restricting the very economic growth those same governments are desperate to rekindle.

It is this dynamic that has resulted in the need for massive fiscal support by governments worldwide and given the growth of the second wave of the virus, the demand request by central bankers for governments to do even more. The problem inherent in this dynamic is that government largesse is not actually free, despite ZIRP and NIRP.  The cost of further increases in government debt, which is already at record high ratio vs. GDP (>92% globally), is the reduced prospects for future growth.  The requirement to repay debt removes the capital available to invest in productive assets and businesses thus reducing the future pace of growth for everyone.

Up to this point, central banks have been able to absorb the bulk of that new issuance by printing money to do so, but that dynamic is also destined to fail over time.  Especially since it is a global phenomenon.  When only Japan, with debt/GDP >230%, was in this situation, it could rely on growth elsewhere in the world to absorb its exports and help service that debt.  But the global recession we saw in Q2 (>90% of the world was in recession) and are likely to see again in Q4 means that there will not be anybody else around to absorb those exports.  This is why every country is seeking a weaker currency, to help those exports, and remains a key reason that the dollar’s demise remains unlikely in the near future.  (This is also why there are a number of analysts who are anticipating a debt jubilee, where government debt owned by central banks will simply be torn up, leaving the cash in the system, but no bonds to repay.  While debt/GDP ratios will decline sharply, inflation will become the new bugbear.)

Of course, this is all in the future, and a lot to read out of UK GDP data, but this cycle has been pretty clear, and at this stage, even the hope for a vaccine to become widely available early next year is unlikely to change the immediate future.  Which brings us back to square one, a market searching for a narrative.

That lack of direction is clear across markets this morning, with equities mixed in Asia (Nikkei +0.7%, Hang Seng (-0.2%, Shanghai -0.1%), lower in Europe (DAX -0.8%, CAC -0.9%, FTSE -0.35%) and US futures split (DOW -0.4%, SPX -0.1%, NASDAQ +0.5%).  I’m not getting a sense of a strong narrative here at all.

Bond markets, meanwhile, are reversing some of their losses from earlier this week, with Treasuries (-3.3bps), Bunds (-1bp) and Gilts (-2.4bps) all firmer while the rest of Europe is also seeing demand for havens amid the modest equity weakness.  Oil prices are virtually unchanged this morning, holding onto their recent gains, but with no capacity to continue to rally.  Gold, on the other hand, has edged slightly higher, up 0.3%.

Finally, the dollar is truly mixed this morning with half the G10 currencies firmer, led by EUR (+0.25%) and CHF (+0.25%), and half weaker led by the pound’s 0.5% decline and AUD (-0.3%).  We already know why the pound is weak, their GDP data, while very strong on paper, disappointed relative to expectations.  As to the rest of the bloc, the truth is given the euro’s weakness yesterday, a little reversal ought to be no surprise.  EMG currencies show a similar split of half weaker and half stronger this morning. On the plus side, other than TRY (+1.2%) which continues to be roiled by the changes at the central bank, the gains are all modest and heavily focused on the CE4 currencies, which are simply following the euro higher.  On the downside, IDR (-0.6%) and KRW (-0.45%) are the weakest of the lot, with both these currencies seeming to see a bit of profit-taking from recent gains.

On the data front, we do get important numbers this morning, all at 8:30.  Initial Claims (exp 731K), Continuing Claims (6.825M) and CPI (1.3%, 1.7% ex food & energy) are on the docket with the first two still giving us our best real time data on economic activity.  Also, we cannot forget that Chairman Powell, along with Madame Lagarde and BOE Governor Bailey, will be speaking later this morning, at 11:45, at an ECB forum, with the outcome almost certainly to be a plea for fiscal stimulus by governments one and all.

In the end, the lack of a compelling narrative implies to me a lack of direction is in store.  As such, I expect little in the way of a resolution in the near future, and thus choppy dollar price action is the best bet.

Good luck and stay safe
Adf

Aged Like Bad Wine

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While Veterans here are recalled
And politics has us enthralled
The dollar’s decline
Has aged like bad wine
With strategies soon overhauled

US markets are closed today in observance of the Veteran’s Day holiday, but the rest of the world remains at work.  That said, look for a far less active session than we have seen recently.  In the first place, with the Fed on holiday, the Treasury market is closed and price action there has been one of the biggest stories driving things lately.  Secondly, while US equity futures markets are trading, all three stock exchanges are closed for the day, so the opportunity for individual company excitement is absent.  And finally, with today being an official bank holiday, while FX staff will be available, staffing will be at skeleton levels and come noon in New York, when London goes home, things here will slow to a standstill.

However, with that as a caveat, the world continues to turn.  For instance, while last week saw meetings in three key central banks, with two of them (RBA and BOE) explaining that easier monetary policy was in store, although the Fed made no such claims, last night saw the smallest of G10 nations, New Zealand, make headlines when the RBNZ explained that they were not changing policy right now, but that the economy there has been far more resilient than expected and they would not likely need to ease monetary policy any further.  It should be no surprise that the market responded by selling New Zealand government bonds (10-year yields rose 14.5 basis points), while overnight rates rose 16 basis points and traders removed all expectations for NIRP. QED, the New Zealand dollar is today’s best performer, rising 0.8%.

Sticking with the central bank theme, and reinforcing my view that the dollar’s decline has likely run its course broadly, although certainly individual currencies can strengthen based on country specific news, were comments from the Bank of Spain’s chief economist, Oscar Arce, explaining that the ECB must do still more to combat the threat of deflation in the Eurozone and that the December meeting will bring an entirely new discussion to the table.  The takeaway from the ECB meeting two weeks ago was that they would be expanding their stimulus programs in December.  Literally every comment we have heard from a European banking official in the interim has, not merely reinforced this view, but has implied that actions then will be massive.

I will repeat my strongly held view that the ECB will not, nay cannot, allow the euro to rise very far in their efforts to reboot the Eurozone economy.  Remember, one of the major benefits expected from easing monetary policy is a weakening of the currency.  When an economy is struggling with growth and deflation issues, as the Eurozone is currently struggling, a weak currency is the primary prescription to fix things.  You can be certain that every time the euro starts to rally near 1.20, which seems to be their tolerance zone, we will hear even more from ECB members about the additional easing in store as Madame Lagarde does her level best to prevent a euro rally.  And if the euro declines, so will the CE4 as well as the pound, Swiss franc and the Scandies.  In other words, the dollar is unlikely to decline much further than we have already seen.

In truth, those are the most noteworthy stories of the session so far.  Virtually every other headline revolves around either the ongoing election questions in the US, both the contestation of the presidential outcome and the upcoming run-off elections in Georgia for two Senate seats and control of the Upper House, or the vaccine and how quickly it can be approved and then widely distributed.

So, a quick look around markets this morning shows that risk appetite is moderate, at best.  For instance, equity markets in Asia were mixed with the Nikkei (+1.8%) continuing its recent strong run, up more than 10% this month, but the Hang Seng (-0.3%) and Shanghai (-0.5%) couldn’t find the same support.  Europe, on the other hand, is all in the green, but the movement is pretty modest with the FTSE 100 (+0.7%) the leader and both the DAX and CAC up just 0.4% at this hour.  US futures, which are trading despite the fact that equity markets here will be closed today, are all higher as well, with the NASDAQ (+1.0%) leading the way after having been the laggard for the first part of the week, while the other two are showing solid gains of 0.65%.

Bond markets in Europe are rising slightly, with yields slipping between 1 and 3 basis points on prospects for further ECB policy ease courtesy of Senor Arce as highlighted above, as there was no new economic data nor other statements of note.  As I mentioned, the Treasury market will be closed today for the holiday.

But commodity markets continue to perform well, with oil prices higher yet again, this morning by 3.2% taking the gains this week to 15%!  Metals prices, both base and precious, are also firmer as the vaccine news continues to spread good cheer regarding economic prospects going forward.

And finally, the dollar is best described as mixed to stronger.  For instance, against its G10 brethren, only NZD is firmer, as explained above.  But the rest of the bloc is softer led by NOK (-0.65%) and EUR (-0.4%).  While the euro makes sense given the Arce comments and growing belief that the ECB will really be aggressive next month, with oil’s sharp rebound, one must be surprised at the krone’s performance.  In fact, this merely reinforces my view that as the euro goes (lower) it will drag many currencies along for the ride.

However, in the EMG bloc, movement has been pretty even (excepting TRY) with a few more losers than gainers, but generally speaking, no really large movement.  On the plus side we see THB (+0.5%) and KRW (+0.45%) leading while on the downside it is MXN (-0.6%) and HUF (-0.45%) in the worst shape.  Looking a bit more deeply, the baht has been rallying all quarter and we may be looking at the last hurrah as the government has asked the BOT to manage the currency’s strength in order to help export industries compete more effectively.  Meanwhile, the won was the beneficiary of a significant jump in preliminary export data, with a 20.1% Y/Y gain for the first ten days of November auguring well for the economy.  Meanwhile, on the downside, the peso, which would have been expected to rally on the back of oil prices, is actually serving as a proxy for Peruvian risk as the impeachment of the president there Monday night has thrown the nation into turmoil and investors are seeking a proxy that is more liquid than the sol.  As to HUF, it is simply tracking the euro’s decline, and we can expect to see the same behavior for the entire CE4 bloc.

And that’s really it for today.  There is no news and no scheduled speakers and the session will be short.  But the dollar is edging higher, so keep that in mind.

Good luck and stay safe
Adf

Over the Moon

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Investors are over the moon
And singing a happy new tune
As Pfizer’s vaccine
Has come on the scene
And raised hope we’ll soon be immune

The market responded with glee
As pundits now seem to agree
With gridlock ahead
The vaccine, instead
Will rescue our economy

Frankly, it is hard to keep up with the narrative shifts between yesterday and today as there have been so many new opinions about how the future will unfold.  As I was completing this missive yesterday morning the Pfizer vaccine news hit the tape.  Certainly, the market was unprepared for an announcement that a vaccine with 90% efficacy was in late stage trials, implying that it could soon be approved, and distribution begun.  Hopes for a vaccine had been a key driver of markets on many days in the past several months, although market rallies were ostensibly keyed by hopes for many things like a blue wave, gridlock, and if you go back far enough, a trade deal.  However, the news of the success triggered a stupendous rally in equity markets and risk assets in general while haven assets, especially Treasuries, Bunds and Gilts, along with the yen, Swiss francs and gold, all sold off sharply.  Yesterday, I was cynical regarding the end of the pandemic being at hand, but this morning, that outcome has far more promise.

Of course, the real question is, if this vaccine truly does work, and is distributed widely enough to instill confidence in the general population, how much has the economy actually changed and to what degree are those changes permanent?

Clearly, the biggest change has been the recognition that working from home, for many jobs, is quite viable.  Technology has reached the point where meetings via Webex or Zoom or Partners seem to be quite productive (at least as productive as any meetings ever are.)  My personal experience is that I have gone from driving nearly 2000 miles per month, largely for commuting, to having driven 3000 miles in the past seven months.  Not only have I used significantly less fuel, but my car has seen dramatically less wear and tear, and thus any replacement has been postponed accordingly.  And that is just one facet of the changes.  Commercial real estate and office buildings will likely need to be repurposed going forward as the requirement for corporate staffs to all gather in a single premise has been shown to be unnecessary.

But what about travel and entertainment?  With a vaccine, does that mean people will be jumping back on airplanes to visit clients or relatives or go on vacation again?  Is the movie theater experience ever going to be as desirable again?  After all, given the remarkable array of streaming entertainment services, and the fact that TV’s have grown so remarkably large, watching at home has many advantages over going out, so what percentage of the population will be heading back out soon?  In truth, the one segment I expect to really benefit is restaurants, as while it appears people embraced preparing food at home, I expect the ability to go out, eat and not have to wash the dishes has real appeal to a majority of the population.

My point is the dynamics of economic activity going forward are likely to be very different than that which we remember from before the pandemic and its attendant lockdowns and disruptions.

Of more importance to our discussion here, what does this mean for the central banks going forward.  Remember, Chairman Powell has essentially promised not to raise interest rates until 2023, a minimum of 2+ years from now.  But what if economic activity takes off, as people find a new mix of activities and regain the confidence to gather when desired.  If growth rebounds and inflation (which is already picking up) continues to rise, will they stand pat because of that promise?  Will the ECB?  The BOJ?  The BOE?  Quite frankly, I believe the central bank community was quite happy with the current situation.  They were largely lauded as heroes for preventing even worse outcomes, they had significantly increased their power and sway within governments, and the playbook was easy, print lots of money and buy bonds (or other assets) to support market functioning.  Not only that, they could carp at governments for not implementing fiscal stimulus and the intelligentsia all agreed!

But if this vaccine really is the difference maker, and people return to some semblance of their pre-covid activities, suddenly, central bank largesse may no longer be needed.  And if they continue their current policies and inflation starts to really pick up, they will be the ones being lambasted for their actions or delayed reactions.  While it is very early day(s) in this new story, it is the first time since before the financial crisis where central bankers may find themselves the targets of wrath, rather than the saviors of the world.  (People wonder whether Chairman Powell will be reappointed; quite frankly he may not want the job!)

With all that in mind, how have markets behaved since the news hit the tape?  Yesterday’s equity market performance was quite interesting, as the early euphoria (DOW 29933) reversed and stocks wound up closing much lower, with the NASDAQ actually falling 1.5% on the day.  There was also a huge rotation from the previous winners (Mega cap tech companies) into the previous losers (value and transportation stocks).  Asia followed suit with a mixed session (Nikkei +0.25%, Hang Seng +1.1%, Shanghai -0.5%) and Europe has also lacked some direction.  For instance, the DAX is unchanged on the day while the CAC has rallied 1.1% despite horrific IP and Labor data.  Spain is much firmer (+2.2%) and Italy has fallen (-0.25%).  In other words, this is not a vaccine driven market, rather it has to do with some pretty lousy data out of Europe.  The US dichotomy continues with DOW futures higher by 0.6%, SPX futures basically unchanged and NASDAQ futures lower by -1.6%. Perhaps there was a bubble in some of those stocks after all.

Bond markets continue to sell off everywhere, except Greece, as the narrative here is quite clear; vaccine => rebounding economic growth => less central bank policy ease => higher rates.  So, this morning 10-year Treasury yields are up to 0.94%, 2 basis points higher than yesterday after a 10-basis point rise yesterday.  But we are seeing yields higher between 1 and 3 basis points throughout Europe as well.  The question to ask is, Is the ‘new vaccine makes everything better’ narrative realistic or overdone, and just how long before economic activity actually starts to rebound?

Finally, the dollar can only be described as mixed, but leaning stronger.  Ignoring TRY (-2.0%) which is what we should always be doing, the EMG markets have more losers than winners with ZAR (-0.7%) and PLN (-0.6%) leading the way.  On the flip side, THB (+0.5%) and CNY (+0.3%) are both performing reasonably well.  If anything, it is hard to cobble together a consistent story as to why any of these currencies are moving in their current direction given the inconsistencies.

As to the G10 space, there have been two gainers of note, GBP (+0.65%) and NOK (+0.5%), with only CHF (-0.3%) showing any real weakness.  The rest of the bloc is little changed overall.  NOK is benefitting from the ongoing rally in oil prices, up another 1.5% this morning, which takes the move since Thursday to a 5% gain.  As to the pound, comments from the BOE’s Chief Economist, Andy Haldane yesterday seemed to change the market’s view as to the possibility of negative rates in the future.  By calling the vaccine a “game changer” he implied future central bank actions were likely to be less aggressive.

On the data front, the NFIB Small Business indicator was released right on expectations of 104.0.  Beyond that, we only see the JOLT’s Job Openings data, but that is for September, so has very limited appeal in a market that is seeing massive changes daily.  As mentioned above, Eurozone data was generally lousy, with both French (-6.0% Y/Y) and Italian (-5.1% Y/Y) Industrial Production disappointing and French Unemployment rising to 9.0%, its highest level since 2018.  As well, German ZEW Surveys were quite weak, with Expectations falling to 39.0, far lower than expected.

And so we have a market that needs to look through worsening recent data to the potential for a dramatic change regarding the vaccine and its ability to help economic activity find a new normal.  My view is we have seen significant excesses in many markets during the past several months and years, and there is every chance a significant amount gets unwound.  I do believe volatility will remain with us for a while, as there are many possible outcomes.  But in the end, while the dollar will have bouts of both strength and weakness, the one thing that will not happen is a collapse.

Good luck and stay safe
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