Post-Covid Themes

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

More Money They’ll Print

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

***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

Aged Like Bad Wine

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

Hopes are now Dashed

Psephologists took a great hit
Their forecasts turned out to be sh*t
The blue wave has crashed
And hopes are now dashed
For Congress, more cash to commit

An astrologer, and economist and a psephologist walk into a bar
“What’s it going to be?” asks the barkeep.
“We have no idea,” they reply

While the final results of the Presidential race are not yet in, nor seem likely to be known before Friday at the earliest, what has become clear is that the Republican party is very likely to retain control of the Senate, no matter what, and that the Democratic majority in the House of Representatives has shrunk.  In other words, the idea of the blue wave, where the Democrats would not merely win the presidency, but retake the Senate and expand their control of the House has been crushed.  And with that outcome, the reflation trade that had gained so many adherents of late, is being quickly unwound.

Thus, the election results have spawned both a bull flattening of the yield curve, with 10-year yields currently lower by 11.5 basis points, while 30-year yields are 13 basis points lower and a dollar rebound, especially against most emerging market currencies.  It had seemed odd yesterday to see such significant market movement ahead of the results of what many expected to be a close, and possibly contested, election.  But clearly, there was a significant amount of enthusiasm for that mythical blue wave.

Until the Presidential results are declared, it will be extremely difficult to focus on US economic issues, as in fairness, given the diametrically opposed platforms of the two candidates, we can only surmise a future path once we know who wins.  As such, I expect the two stories that will dominate for the rest of the week will be the election results and the ongoing covid inspired lockdowns throughout Europe.

As this is not a political discussion, let us turn to the other major storyline.  As of today, it appears that Germany, France, Italy and the UK are all imposing significant restrictions on most, if not all, of their citizens for the entire month of November.  Given the rapid spread of the virus in this wave, Europe reported another 239K new cases yesterday, it is understandable that governments feel the need to act.  However, the balance between trying to maintain economic activity and trying to avoid spending so much money on healthcare save citizens’ lives is a difficult one to maintain.  After all, the EU has very strict guidelines as to what type of budget deficits its members can run, and at this point, every member is over the limit.  It is this reason that Madame Lagarde has been so clear that the ECB can, and will, do more to support the economy.  If they don’t, things will get ugly very quickly.  It is also this reason that leads me to believe the euro has limited upside for the foreseeable future.  Whatever is happening in the US, the situation in Europe is not one that inspires confidence.

Thus, let’s look at how markets are responding to the incomplete election results and the increase in Covid infections.  Equities in Asia had a mixed session, with the Nikkei (+1.7%) performing well while the Hang Seng (-0.2%) suffered on the back of the Ant Financial story.  (This story revolves around the expected IPO of the Chinese company, which was forecast to be the largest of the year, but which the Chinese government squashed.)  Shanghai equities were little changed on the session, up just 0.2%.  Europe, however, has seen early gains evaporate and at this point could best be characterized as mixed.  The DAX (-0.1%) is the laggard, while the CAC and FTSE 100 (+0.2% each) are marginally higher.  However, Spain’s IBEX (-1.1%) is feeling the pain of the lockdowns, as is Italy’s MIB (-0.25%).  US futures are quite interesting at this point, with DOW futures actually lower by 0.1%, while NASDAQ futures are 2.0% higher.  And NASDAQ futures were as much as 4.5% higher earlier in the session.  It seems that the status quo in US politics is deemed a positive for the Tech mega caps, while the cyclical companies are expected to have a much tougher time.  As well, if President Trump wins, there will be no expectation of significant tax hikes, something that would have been a virtual certainty with a President Biden.

As discussed above, Treasuries are rallying fiercely.  But we are seeing rallies throughout Europe as well, with Gilt yields leading the way, having fallen by 4.3 bps, but most of the continent looking at 2bp declines.  This appears to be either position unwinding or a renewed enthusiasm that the ECB is going to step up in a massive way next month.  Recall, yesterday, bonds fell everywhere, so a rebound is not that surprising, especially for those who were selling based on the moves in the US.  However, I suspect that given the newest lockdown announcements, investors have become increasingly convinced that the ECB is going to get perilously close to the idea of direct funding of government deficits, something that is verboten within the rules, but something that is desperately needed by the likes of Italy, Spain and Greece.

As to the dollar, yesterday’s sharp decline was puzzling for the same reason the bond market sell-off was puzzling, and so, this morning’s rebound makes perfect sense.  While earlier in the session, the dollar had seen much sharper gains, at this hour (6:52am), those gains are fairly modest.  AUD (-0.4%) is the worst G10 performer, followed closely by GBP (-0.35%) and NZD (-0.35%).  Meanwhile, both haven currencies, CHF and JPY have climbed back to unchanged on the day from earlier session losses.  With the election news still roiling markets, it is nonsensical to try to attribute these moves to anything other than position moves.

EMG currencies are also under pressure virtually across the board, and like the G10, the early declines, which in some cases were quite substantial have abated.  For instance, MXN (-4.1% last night, -1.0% now) showed the most volatility, but CNY (-1.0% last night, unchanged now) also saw substantial movement.  Again, to attribute this, or any currency movement, to anything other than position adjustment in the wake of the US election results would be a mistake.

As to the data today, the Services PMI data was released throughout Europe and was pretty much as expected.  ISM Services (exp 57.5) is out at 10:00 and expected to continue to show surprising growth.  Before that, we see the Trade Balance (exp -$63.9B), but trade policy is just not of interest these days.

Rather, the market will remain enthralled with the election results, which as I type remain decidedly unclear.  Either candidate could win the key remaining states of Pennsylvania, Michigan and Georgia, although all three are trending Trump right now.

In the end, the election result will matter because it will inform policy ideas.  If we remain status quo ante, the dollar likely has further to rise.  If Mr Biden emerges victorious, the dollar could certainly cede its recent gains, but no collapse is in sight.

Good luck and stay safe
Adf

There is Trouble

It seems that the virus mutated
In Spain, which has now complicated
The efforts by France
To alter their stance
On lockdowns, with new ones created

In Germany, too, there is trouble
With cases, this week, set to double
So, Madame Lagarde
Will simply discard
Her fears, and inflate the bond bubble

The second wave of infections, or perhaps the third, is clearly washing over Europe with Covid-19 cases surging across the continent.  The situation has deteriorated so rapidly that, in short order, both Germany and France have ordered lockdowns, closing restaurants, bars, gyms and theaters for the next month.  Public gatherings are being restricted to ten people drawn from only two families as hospital beds throughout both nations fill up quickly.  Research to be released this morning has identified a new strain of the virus that apparently originated in Spanish farm workers during the summer and has been the main version in the latest outbreak.  It seems that it was spread by people returning to their homelands from Spanish holidays.

Meanwhile, Spain and Italy are also contemplating nationwide lockdowns as infections surge there, and even countries that saw a limited outbreak last spring, like the Czech Republic, are under severe pressure now.  Add it all up and you have a recipe for a fourth quarter of negative growth on the continent.  Seemingly, the only part of the Eurozone economy that is performing well are German capital goods exporters as their main market, China, has been rebounding.

With this as background, now consider that you are Christine Lagarde and chairing the ECB policy meeting today.  While the ECB has made significant efforts to support every Eurozone nation during the current crisis, clearly the situation remains fraught.  Is there anything that she can do to shore up confidence?

The punditry is pretty united in their views at this time, not expecting any policy changes at today’s meeting in the belief that the council will want to wait for updated economic forecasts in December before adding to the PEPP. Estimates for an increase in that QE program have coalesced around €500 billion.  If anything, the only expectations for today are for Lagarde to essentially promise that the ECB will announce the expansion of their policy accommodation in December.  While this may well be the outcome, if there is one thing we should have learned from Signor Draghi’s time in Lagarde’s chair, it is that acting sooner than expected and larger than expected are the only ways for the ECB to alter the narrative.  And right now, the narrative is leaning toward the ECB is powerless to prevent the next downturn.

With this in mind, and recognizing that Lagarde, while perhaps not the most sophisticated economic mind on the council, is clearly the best politician, and with the new gloom and doom reports coming in daily, if not hourly, I think there is a decent probability that the ECB acts today.  After all, if they are certain they are going to increase the PEPP program in December, what is the advantage to waiting.  And while I don’t think that a rate cut is in the cards yet, there is a non-zero probability of that too.  News earlier this week, that didn’t get much press in the US, highlighted that small German banks, of which there are nearly 1800, have started to charge depositors to maintain deposits from the first euro.  So, savings accounts are going to be taxed subject to negative interest.  If banks are starting to pass on the costs of ECB monetary policy, then the ECB is likely to be far more comfortable in cutting rates further as they recognize that the banking system there is likely to have halted the decline in lending spreads.  Hence, my out of consensus view is we see some definitive action from the ECB this morning.

Leading up to that meeting, with the announcement to be made at 8:45 this morning (Daylight Savings time has already occurred there), markets are rebounding modestly from yesterday’s risk reducing session.  I’m sure you are all aware of he size of the decline in stock market indices yesterday, with US markets falling ~3.5%, their worst single day performance since June.  What was quite interesting about the session, though, was while equity risk was abandoned, haven assets, which had a bid early in the session, lost their luster as well.  In fact, Treasury bonds wound up the day unchanged, and yields there are actually almost a basis point higher this morning.

A quick tour of equity markets shows that Asian markets were somewhat lower (Nikkei -0.4%, Hang Seng -0.5%, Shanghai +0.1%), although they all closed well off the worst levels of the session.  European bourses are ever so slightly higher, on average, with the DAX (+0.4%), CAC (+0.1%) and FTSE 100 (+0.3%) all in the green.  The big outlier here is Spain’s MIB (-0.95%), which is feeling the pain of the latest story about the genesis of the new strain of the virus, as well as responding to the announcement by PM Sanchez that the national state of emergency has been extended for six months, meaning lockdowns are almost certainly coming there soon.  US futures, meanwhile, are currently up about 0.5%-0.7%, although that is well off the earlier session highs.  The question remains is this a modest trading bounce, or was yesterday an aberration?

Unlike the Treasury market, with a modest uptick in yields, Bunds and OATs are both rallying with 1 basis point declines.  It seems I am not the only one who thinks the ECB may act today, as any early action should see an uptick in demand for European paper.  Oil, on the other hand, is having another tough day, down 3.5%, and at $36/bbl, WTI is back to its lowest level since mid-June.  Fears over slipping demand alongside growing supply are infiltrating the market.

As to the dollar, early price activity was mixed, but it is seeing some demand in the past hour and is now largely higher on the day.  NOK (-0.95%) is the laggard again, following oil lower, but we are seeing weakness, albeit modest weakness, from SEK (-0.4%) and EUR (-0.2%).  Certainly, if I am correct in my view on the ECB, we should see the euro decline further.  On the plus side, only JPY (+0.25%) is gaining on the greenback as the BOJ’s lack of policy action combined with a background of fear over the new lockdowns and their impact on economic activity, has some Japanese investors taking their money home.  This is a trend that has legs.

EMG currencies have also turned from a mixed bag to a nearly universal decline, although the losses are not enormous.  For a change of pace, MXN (-0.7%) is the laggard today, suffering from the ongoing oil price declines, and pushing TRY (-0.6%) back to only the second worst performing currency.  But EEMEA currencies are all lower in the 0.3%-0.5% range.  In fact, the only gainer today is CNY (+0.25%) which continues to benefit from investment inflows as the Chinese economy continues to be the world’s top performer.

On the data front, today we see the most important points of the week.  Initial Claims (exp 770K) and Continuing Claims (7.775M) have been falling but remain substantially higher than even during the worst recessions in the past 75 years.  Of possibly more interest will be this morning’s first reading of Q3 GDP (exp 32.0%), which while it will be a record, will not make up for the loss in Q2.  And right after those are released, we hear from the ECB, so the 30 minutes between 8:30 and 9:00 have the chance for some fireworks.

In the end, it appears to me that risk will continue to be shed leading up to the election, and with that activity, we will see the dollar (and yen) grind higher.

Good luck and stay safe
Adf

Giddy and Squiffed

The narrative’s starting to shift
As good news is getting short shrift
From ‘Here comes the boom’
To darkness and gloom
Short sellers are giddy and squiffed

In Europe the data is fading
While Covid continues invading
At home in the States
All our interest rates
Are falling amidst active trading

Just two weeks ago, equity markets were pushing higher, and despite the growing resurgence in Covid cases worldwide, it looked like new all-time highs were in store for investors.  After all, there was so much optimism that a stimulus package would be enacted before the election, and there was so much optimism that a vaccine would be approved in short order, with the combination of those events resulting in the final leg of that elusive V-shaped recovery.  There was hope on the Brexit front, and the story of the blue wave in the US election was everywhere, which seemed (for some reason) to be seen as a positive for risk assets.  Ah…the good old days.

But that is soooo two weeks ago!  This morning, the world looks a different place.  Seemingly, every headline revolves around either government reactions to quickly inflating Covid case counts (Curfews in Spain, German restaurants, bars, clubs and gyms to be closed for a month, Chicago closing restaurants for a month), or central bank responses to these issues (Bank of Canada to reiterate lower forever for longer, ECB to describe expansion in PEPP).  And guess what?  Investors are no longer feeling the love of the longest bull market in history.  Risk assets, overall, are being tossed out as quickly as possible and haven assets are in demand.  While yesterday had many risk-off features, today is the textbook definition of a risk-off session.

Let’s dive into the equity market first, the asset class that most associate with risk appetite.  While Asian markets were mixed (Nikkei -0.3%, Hang Seng -0.3%, Shanghai +0.45%), Europe really spit the bit this morning, with the FTSE 100 (-1.7%) the best performer of the lot.  The DAX (-3.2%) and the CAC (-2.9%) are both under significant pressure, as is Spain’s MIB (-2.9%) after the curfew announcement.  Not only have all these markets fallen below key moving averages, but the DAX (-11% from the recent high) and CAC (-9% from recent high) have either entered or are nearing correction territory.  The big difference between European markets and those in the US has been that post-Covid, European markets never came close to regaining the pre-Covid highs.  So, these declines are quite painful.  As to US futures markets, all are much lower, with DOW futures down by more than 1.5%, and even NASDAQ futures down by more than 1.0%.  In other words, equity investors are running scared today.

What about bond markets, you may ask?  We couldn’t have a more classic risk-off session in government bond markets than we are seeing today.  Treasury yields are down 2 basis points in the 10-year, which takes the move since Friday’s highs to 11 basis points.  Perhaps that much steeper curve is not in our immediate future.  Meanwhile, in Europe, Bunds are 2.5bps lower, now trading at their lowest yield (-0.64%) since the spike in March.  But we are seeing buying interest in OAT’s (-1.2bps) and Gilts (-2.3bps) as well.  At the same time, the PIGS are showing their true colors, government bonds that are risk assets, not havens.  This morning, Portugal (+1.4bps), Italy (+4.4bps), Greece (+5.3bps) and Spain (+1.0bps) have all seen selling interest, with the two countries with the biggest debt loads seeing the worst outcome.  I would also note that Canadian Treasury yields have fallen 3 basis points this morning as investors prepare to hear from Governor Tiff Macklem at 11:00, after the BOC announcement, with near universal expectations that he will reiterate the fact that the BOC will not be raising rates for many years to come, as they seek to sustainably achieve 2.0% inflation.

Nobody will be surprised that commodity markets are under pressure this morning, with oil really suffering (WTI -3.8%), and the metals and agricultural complexes also feeling the heat.

Finally, as we turn to the FX market, we once again see classic risk-off behavior, with the dollar higher against all its G10 brethren except the yen (+0.2%).  Leading the way lower is NOK (-1.5%) as the weak oil price is taking a significant toll on the krone, but also SEK (-1.0%), NZD (-0.65%) and GBP (-0.55%) are under serious pressure.  Prior to today’s decline, SEK had rallied more than 5% over the past month and was the top performing G10 currency during that time.  Sweden’s approach to Covid, while blasted in the press back in March, turned out to have been pretty successful, as they are the only country in Europe not suffering a second wave of note.  As such, their economy has outperformed the rest of Europe, and the currency benefitted accordingly.  But not today, when risk is out the window.  As to Kiwi, the news that the government is forcibly removing infected people from their homes and placing them in government run facilities has certainly tarnished the image of the country being a free land.  The resurgence in the UK, and truthfully throughout all of Europe, as well as the government responses is making clear the idea that whatever economic gains were made in Q3, they are likely to be reversed in Q4.  So, while things are no picnic in the US, the situation here seems to be better than there.

In the emerging markets, we are also seeing a significant sell-off in most currencies.  TRY (-1.3%), MXN (-1.25%) and RUB (-1.15%) are the worst performers, with the latter two clearly under pressure from declining oil prices while Turkey continues to suffer capital flight as the President Erdogan courts more sanctions from Europe and the central bank is forbidden restricted from raising rates to protect a free-falling currency by the president.  But the weakness is pervasive as the CE4 are all much weaker, led by PLN (-1.1%) and HUF (-1.0%) and the rand (-0.85%) and even KRW (-0.45%) are falling.  LATAM currencies have yet to open, but after yesterday’s performance (BRL -1.45%), they are all called lower at this hour.

Interestingly, there has been no data of note released anywhere in the world, and we are not expecting any here in the US either.  So, this market movement is far more about market positioning and market sentiment, two things which are the direct consequences of the narrative.  We have discussed the record short positions in Treasury bond futures as the narrative had focused on the assumed Biden victory in the election resulting in massive fiscal stimulus and correspondingly massive debt issuance driving bond prices lower and yields higher.  The thing is, the trajectory of recent polls shows that the certainty of a Biden victory is fading, which would naturally change that piece of the narrative.  It is critical to remember, as one is managing risk, that markets move for many reasons, with clear catalysts like data points or election results, driving a minority of the activity.  Most movement comes from narrative shifts and position adjustments as well as particular flows in a currency or other instrument.  The point is, if the narrative is shifting like I described, and I do believe it is doing so, then we have further risk reduction in store.

Good luck and stay safe
Adf

Quickly Diminished

As Covid continues to spread
The hopes for a rebound ahead
Have quickly diminished
And though, not quite finished
The data needs to, higher, head

Today, for example, we learned
That Germany’s growth trend has turned
Instead of a V
The bears, filled with glee
Are certain the bulls will be burned

The seeds of doubt that were sown last week may have started to sprout green shoots.  Not only is it increasingly unlikely that any stimulus deal will be reached before the election in eight days, but we are starting to see the data reflect the much feared second wave in the number of Covid-19 cases.  The latest example of this is Germany’s IFO data this morning, which disappointed on the two most important readings, Business Climate and Expectations.  Both of these not only missed estimates, but they fell compared to September’s downwardly revised figures.  This is in concert with last week’s Flash PMI Services data, which disappointed throughout Europe, and can be directly attributed to the resurging virus.  Germany, Spain, Italy and France are all imposing further restrictions on movement and activity as the number of new cases throughout Europe continues to rise, climbing above 200K yesterday.  With this data as this morning’s backdrop, it cannot be surprising that risk is under pressure.

For investors, the landscape seems to have shifted, from a strong belief in a V-shaped recovery amid additional fiscal stimulus throughout the G10 along with a change at the White House, that for many would bring a sigh of relief, to a far less certain outcome.  The increase in government restrictions on activity is leading directly to more uncertainty over the economic future.  Meanwhile, a tightening in the polls has started to force those same investors to reevaluate their primary thesis; a blue wave leading to significant fiscal stimulus, a weaker dollar and a much steeper yield curve.  That has seemingly been the driver of 10-year and 30-year yields in the US, which last week traded to their highest levels since the position related spike in June.  In fact, positioning in the long bond future (-235K contracts) is at record short levels.

With this as backdrop, it is entirely realistic to expect some position unwinding, especially if the underlying theses are being called into question.  This morning, that seems like what we are watching.  Risk is decidedly off this morning, with equity markets around the world broadly lower, haven government bond yields falling and the dollar on the move higher.  Oil prices are under pressure, and the risk bulls’ rose-tinted glasses seem to be fogging up, at the very least.

Starting with equity markets, Asia had a mixed session, taking its lead from Friday’s US price action, as the Hang Seng (+0.5%) managed to rally a bit while both the Nikkei (-0.1%) and Shanghai (-0.8%) finished in the red.  Europe, meanwhile, is floating in a red tide with Germany’s DAX (-2.3%) the laggard, but the CAC (-0.6%) and FTSE 100 (-0.4%) starting to build momentum lower.  The DAX is suffering, not only from the IFO data, but also from the fact that SAP, one of the major components in the index, is lower by nearly 19% after dramatically cutting its revenue forecasts due to the virus’ impact on the economy.  It seems the question should be, how many other companies are going to have the same outcome?  And finally, US futures are all pointing lower by 0.8% or so, certainly not an encouraging sign.

Bond markets have shown quite a bit of volatility this morning, with 10-year Treasury prices climbing and yields down 3 basis points from Friday.  However, the European session is quite different.  The first thing to note is Italian BTP’s have rallied sharply, with yields there falling 5.5 basis points after S&P not only failed to downgrade the country’s credit rating, but actually took it off negative watch on the basis of the idea that ECB support plus a resumption in growth would allow the country to reduce its budget deficit and hence, the trend growth in its debt/GDP ratio.  German bunds, on the other hand, have sold off a bit and are higher by 1bp, but that appears to be the result of the unwinding of Bund-BTP spread wideners, as the market was definitely convinced a downgrade was coming.  The S&P news also has helped the rest of the PIGS, which have all seen yields decline about 2 basis points this morning.  Caution, though, is required, as an ongoing risk-off performance by equity markets will almost certainly result in Bunds finding significant bids.

As to the dollar, it is broadly stronger this morning, although not universally so.  In the G10, the euro (-0.3%) is under pressure as Germany suffers, and we are also seeing weakness in CAD (-0.4%) with oil prices making a strong move lower, and WTI now sitting well below $40/bbl.  On the plus side, the pound (+0.15%) seems to be benefitting from a bit of Brexit hope as talks between the two sides have resumed, while SEK (+0.15%) is the beneficiary of the fact that Sweden will not be locking down the country as the growth in Covid cases there remains miniscule, especially compared to the rest of Europe.

EMG currencies, though, are having a tougher time this morning with TRY (-1.25%) leading the way, but MXN (-0.8%) and ZAR (-0.6%) also significantly underperforming.  The latter two here are directly related to weakness in commodity prices across the board, while Turkey remains in its own private nightmare of an impotent central bank trying to overcome the threat of further economic sanctions driven by President Erdogan’s aggressive actions in the Eastern Mediterranean.  Meanwhile, the CE4 are all softer (CZK -0.6%, PLN -0.4%) as they feel the pain of further government restrictions on social activities amid a growing caseload of new covid infections.  In fact, there was really only one gainer of note in this bloc, KRW (+0.45%) which responded to growing expectations that South Korea’s economy would rebound more quickly than the G7 amid growing exports and the so-far absent second wave.

As it is the last week of the month, we have a bunch of data to which to look forward, including the first reading of Q3 GDP, and we also hear from the ECB on Thursday.

Today New Home Sales 1025K
Tuesday Durable Goods 0.5%
-ex Transport 0.4%
Case Shiller Home Prices 4.20%
Consumer Confidence 101.9
Thursday ECB Deposit Rate -0.50%
Initial Claims 780K
Continuing Claims 7.8M
Q3 GDP 31.8%
Friday Personal Income 0.3%
Personal Spending 1.0%
Core PCE Deflator 0.2% (1.7% Y/Y)
Chicago PMI 58.0
Michigan Sentiment 81.2

Source: Bloomberg

Now, the GDP number, which will almost certainly be the largest ever, is forecast to mirror the percentage gain of Q2’s percentage loss, but remember, the way the math works is that a 30% decline requires a 42% gain to make up the difference, so the economy is still well below the activity levels seen pre-covid.  As to the ECB, there are no expectations for policy changes, but most analysts are looking for strong indications of what will come in December.  To me, the risk is they act sooner rather than later, so perhaps a little more opportunity for the euro to decline on that.

As for today, unless we see positive stimulus bill headlines from the US, my sense is that the dollar will drift a bit lower from here as further position adjustments are the order of the day.

Good luck and stay safe
Adf

More Sales Than Buys

The virus has found a new host
As Trump has now been diagnosed
Investors reacted
And quickly transacted
More sales than buys as a riposte

While other news of some import
Explained that Lagarde’s come up short
Seems prices are static
Though she’s still dogmatic
Deflation, her ideas, will thwart

Tongues are wagging this morning after President Trump announced that he and First Lady Melania have tested positive for Covid-19.  The immediate futures market response was for a sharp sell-off, with Dow futures falling nearly 500 points (~2%) in a matter of minutes.  While they have since recouped part of those losses, they remain lower by 1.4% on the session.  SPU’s are showing a similar decline while NASDAQ futures are down more than 2.2% at this time.

For anybody who thought that the stock markets would be comfortable in the event that the White House changes hands next month, this seems to contradict that theory.  After all, what would be the concern here, other than the fact that President Trump would be incapacitated and unable to continue as president.  As vice-president Pence is a relative unknown, except to those in Indiana, investors seem to be demonstrating a concern that Mr Trump’s absence would result in less favorable economic and financial conditions.  Of course, at this time it is far too early to determine how this situation will evolve.  While the President is 74 years old, and thus squarely in the high-risk age range for the disease, he also has access to, arguably, the best medical attention in the world and will be monitored quite closely.  In the end, based on the stamina that he has shown throughout his tenure as president, I suspect he will make a full recovery.  But stranger things have happened.  It should be no shock that the other markets that reacted to the news aggressively were options markets, where implied volatility rose sharply as traders and investors realize that there is more potential for unexpected events, even before the election.

Meanwhile, away from the day’s surprising news we turn to what can only be considered the new normal news.  Specifically, the Eurozone released its inflation data for September and, lo and behold, it was even lower than quite low expectations.  Headline CPI printed at -0.3% while Core fell to a new all-time low level of 0.2%.  Now I realize that most of you are unconcerned by this as ECB President Lagarde recently explained that the ECB was likely to follow the Fed and begin allowing inflation to run above target to offset periods when it was ‘too low’.  And according to all those central bank PhD’s and their models, this will encourage businesses to borrow and invest more because they now know that rates will remain low for even longer.  The fly in this ointment is that current expectations are already for rates to remain low for, essentially, ever, and business are still not willing to expand.  While I continue to disagree with the entire inflation targeting framework, it seems it is becoming moot in Europe.  The ECB has essentially demonstrated they have exactly zero influence on CPI.  As to the market response to this news, the euro is marginally softer (-0.25%), but that was the case before the release.  Arguably, given we are looking at a risk off session overall, that has been the driver today.

Finally, let’s turn to what is upcoming this morning, the NFP report along with the rest of the day’s data.  Expectations are as follows:

Nonfarm Payrolls 875K
Private Payrolls 875K
Manufacturing Payrolls 35K
Unemployment Rate 8.2%
Average Hourly Earnings 0.2% (4.8% Y/Y)
Average Weekly Hours 34.6
Participation Rate 61.9%
Factory Orders 0.9%
Michigan Sentiment 79.0

Source: Bloomberg

Once again, I will highlight that given the backward-looking nature of this data, the Initial Claims numbers seem a much more valuable indicator.  Speaking of which, yesterday saw modestly better (lower) than expected outcomes for both Initial and Continuing Claims.  Also, unlike the ECB, the Fed has a different inflation issue, although one they are certainly not willing to admit nor address at this time.  For the fifth consecutive month, Core PCE surprised to the upside, printing yesterday at 1.6% and marching ever closer to their (symmetrical) target of 2.0%.  Certainly, my personal observation on things I buy regularly at the supermarket, or when going out to eat, shows me that inflation is very real.  Perhaps one day the Fed will recognize this too.  Alas, I fear the idea of achieving a stagflationary outcome is quite real as growth seems destined to remain desultory while prices march ever onward.

A quick look at other markets shows that risk appetites are definitely waning today, which was the case even before the Trump Covid announcement.  The Asian markets that were open (Nikkei -0.7%, Australia -1.4%) were all negative and the screen is all red for Europe as well.  Right now, the DAX (-1.0%) is leading the way, but both the CAC (-0.9%) and FTSE 100 (-0.9%) are close on its heels.  It should be no surprise that bond markets have caught a bid, with 10-year Treasury yields down 1.5 basis points and similar declines throughout European markets.  In the end, though, these markets remain in very tight ranges as, while central banks seem to have little impact on the real economy or prices, they can manage their own bond markets.

Commodity prices are softer, with oil down more than $1.60/bbl or 4.5%, as both WTI and Brent Crude are back below $40/bbl.  That hardly speaks to a strong recovery.  Gold, on the other hand, has a modest bid, up 0.2%, after a more than 1% rally yesterday which took the barbarous relic back over $1900/oz.

And finally, to the dollar.  This morning the risk scenario is playing out largely as expected with the dollar stronger against almost all its counterparts in both the G10 and EMG spaces.  The only exceptions are JPY (+0.35%) which given its haven status is to be expected and GBP (+0.15%) which is a bit harder to discern.  It seems that Boris is now scheduled to sit down with EU President Ursula von der Leyen tomorrow in order to see if they can agree to some broad principles regarding the Brexit negotiations which will allow a deal to finally be agreed.  The market has taken this as quite a positive sign, and the pound was actually quite a bit higher (+0.5%) earlier in the session, although perhaps upon reflection, traders have begun to accept tomorrow’s date between the two may not solve all the problems.

As to the EMG bloc, it is essentially a clean sweep here with the dollar stronger across the board.  The biggest loser is RUB (-1.4%) which is simply a response to oil’s sharp decline.  But essentially all the markets in Asia that were open (MYR -0.3%, IDR -0.2%) fell while EEMEA is also on its back foot.  We cannot forget MXN (-0.55%), which has become, perhaps, the best risk indicator around.  It is extremely consistent with respect to its risk correlation, and likely has the highest beta to that as well.

And that’s really it for the day.  The Trump story is not going to change in the short-term, although political commentators will try to make much hay with it, and so we will simply wait for the payroll data.  But it will have to be REALLY good in order to change the risk feelings today, and I just don’t see that happening.  Look for the dollar to maintain its strength, especially vs. the pound, which I expect will close the day with losses not gains.

Good luck, good weekend and stay safe
Adf

Absent Demand

With Autumn’s arrival at hand
The virus has taken a stand
It won’t be defeated
Nor barely depleted
Thus, markets are absent demand

Risk is definitely on the back foot this morning as concerns grow over the increase in Covid-19 cases around the world.  Adding to the downward pressure on risk assets is the news that a number of major global banks are under increased scrutiny for their inability (unwillingness?) to stop aiding and abetting money laundering.  And, of course, in the background is the growing sense that monetary authorities around the world, notably the Fed, have run out of ammunition in their ongoing efforts to support economic growth in the wake of the government imposed shutdowns.  All in all, things look pretty dire this morning.

Starting with the virus, you may recall that one of the fears voiced early on was that, like the flu, it would fade somewhat in the summer and then reassert itself as the weather cooled.  Well, it appears that was a pretty accurate analysis as we have definitely seen the number of new cases rising in numerous countries around the world.  Europe finds itself in particularly difficult straits as the early self-congratulatory talk about how well they handled things vis-à-vis the US seems to be coming undone.  India has taken the lead with respect to the growth in cases, with more than 130,000 reported in the past two days.  The big concern is that government’s around the world are going to reimpose new lockdowns to try to stifle growth in the number of cases, but we all know how severely that can impact the economy.  So, the question with which the markets are grappling is, will the potential long-term benefit of a lockdown, which may reduce the overall caseload outweigh the short-term distress to the economy, profits and solvency?

At least for today, investors and traders are coming down on the side that the lockdowns are more destructive than the disease and so we have seen equity markets around the world come under pressure, with Europe really feeling the pain.  Last night saw the Hang Seng (-2.1%) and Shanghai (-0.6%) sell off pretty steadily.  (The Nikkei was closed for Autumnal Equinox Day.)  But the situation in Europe has been far more severe with the DAX (-3.2%), CAC (-3.1%) and FTSE 100 (-3.5%) all under severe pressure.  All three of those nations are stressing from an increase in Covid cases, but this is where we are seeing a second catalyst, the story about major banks and their money laundering habits.  A new report has been released that describes movement of more than $2 trillion in illicit funds by major (many European) banks, even after sanctions and fines have been imposed.  It can be no surprise that bank stocks throughout Europe are lower, nor that pre-market activity in the US is pointing in the same direction.  As such, US future markets showing declines of 1.5%-2.0% are right in line with reasonable expectations.

And finally, we cannot ignore Chairman Powell and the Fed.  The Chairman will be speaking before Congress three times this week, on both the need for more fiscal stimulus as well as the impact of Covid on the economy.  Now we already know that the Fed has implemented “powerful” new tools to help support the US, after all, Powell told us that about ten times last week in his press conference.  Unfortunately, the market is a bit less confident in the power of those tools.  At the same time, it seems the ECB has launched a review of its PEPP program, to try to determine if it has been effective and how much longer it should continue.  One other question they will address is whether the original QE program, APP, should be modified to be more like PEPP.  It is not hard to guess what the answers will be; PEPP has been a huge success, it should be expanded and extended because of its success, and more consideration will be given to changing APP to be like PEPP (no capital key).  After all, the ECB cannot sit by idly and watch the Fed ease policy more aggressively and allow the euro to appreciate in value, that would be truly catastrophic to their stated goal of raising the cost of living inflation on the Continent.

With all that in mind, a look at FX markets highlights that the traditional risk-off movement is the order of the day.  In other words, the dollar is broadly stronger vs. just about everything except the yen.  For instance, in the G10 space, NOK (-1.45%) is falling sharply as the combination of risk aversion and a sharply lower oil price (WTI -2.5%) has taken the wind out of the krone’s sails.  But the weakness here is across the board as SEK (-0.8%) and the big two, GBP (-0.5%) and EUR (-0.45%) are all under pressure.  It’s funny, it wasn’t that long ago when the entire world was convinced that the dollar was about to collapse.  Perhaps that attitude was a bit premature.  In fact, the euro bulls need to hope that 1.1765 (50-day moving average) holds because if the technicians jump in, we could see the single currency fall a lot more.

As to the emerging markets, the story is the same, the dollar is broadly higher with recent large gainers; ZAR (-2.0%) and MXN (-1.4%), leading the way lower.  But the weakness is broad-based as the CE4 are all under pressure (CZK -1.3%, HUF -1.1%, PLN -0.95%) and even CNY (-0.2%) which has been rallying steadily since its nadir at the end of May, has suffered.  In fact, the only positive was KRW (+0.2%) which benefitted from data showing that exports finally grew, rising above 0.0% for the first time since before Covid.

As to the data this week, it is quite light with just the following to watch:

Tuesday Existing Home Sales 6.01M
Wednesday PMI Manufacturing (Prelim) 53.3
Thursday Initial Claims 840K
Continuing Claims 12.45M
New Home Sales 890K
Friday Durable Goods 1.1%
-ex Transport 1.0%

Source: Bloomberg

The market will be far more interested in Powell’s statements, as well as his answers in the Q&A from both the House and Senate.  The thing is, we already know what he is going to say.  The Fed has plenty of ammunition, but with interest rates already at zero, monetary policy needs help from fiscal policy.  In addition to Powell, nine other Fed members speak a total of twelve times this week.  But with Powell as the headliner, it is unlikely they will have an impact.

The risk meme is today’s story.  If US equity markets play out as the futures indicate, and follow Europe lower, there is no reason to expect the dollar to do anything but continue to rally.  After all, while short dollar positions are not at record highs, they are within spitting distance of being so, which means there is plenty of ammunition for a dollar rally as shorts get covered.

Good luck and stay safe
Adf