Quickly Fading

With stimulus hopes quickly fading
And Covid, more countries pervading
Most risk appetites
Have been read last rites
Thus traders, to buy, need persuading

Well, yesterday was no fun, at least if you owned equities in your portfolio, as we saw sharp declines throughout European and US markets.  And frankly, today is not shaping up to be much better.  Risk assets are still being jettisoned around the world as investors run to havens.  Perhaps the only place this is not true is China, where recent data releases show the economy there moving back toward trend growth.  The question at hand, then, seems to be, Is this the beginning of the widely anticipated sell-off/correction?  Or is this simply a short-term blip in an otherwise strong uptrend in risk asset pricing?

Evidence on the side of the broader sell-off comes in the form of; a) the lack of a stimulus bill, which seems officially impossible before the election, and to which may hopes were pinned; and b) the increasing spread of Covid-19, forcing governments worldwide to reimpose restrictions on dining, drinking and many in-person services.  Without the stimulus to offset the economic activity that is being halted, the prospects of economic growth are fading quickly.  And unless the Fed or ECB starts to give money directly to citizens, rather than simply purchase securities, there is very little either one can do to prevent a more serious economic downturn.

Worryingly, the evidence for the short-term blip thesis is entirely technical, as yesterday’s price action halted at a key trend line, thus did not ‘officially’ break lower.  Certainly, it is exceedingly difficult to find a good reason to believe that, after a remarkable runup since the March lows, there is much left in the tank of this rally.  On what basis does one become bullish from here?  After all, the hopes for stimulus have been dashed, at least in the near-term.  Hopes for a vaccine have taken a back seat as well, with much less discussion as numerous candidates continue to go through phase 2 and 3 trials, but nothing has been approved.  The problem with the hopes for a vaccine being approved quickly is that a key part of the approval process is to ensure that there are no long-term side effects for those that prove efficacious.  And that simply takes time and cannot be accelerated.

Meanwhile, as the US election nears, investors appear to be taking their cues from the polls and expectations for a Biden victory are growing.  It is interesting to me that given the Democratic platform of higher taxes, more government intrusion into the economy and an attack on the mega-cap tech companies with an eye toward breaking them up, that investors believe a Blue wave will be positive for equities.  It seems to me, all of those would be decidedly negative outcomes for shareholders as we would transition from one of the most openly business-friendly presidencies to what, on the surface, would shape up as one of the least business-friendly administrations.  Yet, nearly everything that has been published, or at least that I have seen, comes down on the side of a Biden victory as being positive for risk assets.  While this appears to be entirely on the strength of expectations for a massive new stimulus bill, for an institution that prides itself on its forward-looking abilities, one would think the negatives of even larger increases in the budget deficit and the public debt required to fund those, would be recognized as distinctly negative.

But for now, the narrative remains if the polls are correct, risk assets will perform well, the yield curve will steepen, and the dollar will decline.  While I would argue the first two are unlikely, the dollar’s behavior will depend on what happens elsewhere in the world, thus seems impossible to call at this time.

And that seems to be the state of play this morning.  So, let’s take a look around markets at this hour.  Overnight equity action saw a mixed bag with the Nikkei essentially unchanged, the Hang Seng (-0.5%) softening and Shanghai (+0.1%) marginally higher.  As an aside, Australia’s ASX 200 fell 1.7%, despite the relatively positive news about China.  In Europe, while the FTSE 100 is back to flat on the session, the Continent remains under water led by the CAC (-1.0%) but with solid declines elsewhere (DAX -0.4%, Italy’s MIB -0.55%).  These readings, though, are actually better than from earlier in the session.  Finally, US futures have also improved in the past hour and are now pointing higher by roughly 0.5%.

Bond markets are showing modest risk-off tendencies this morning, at least throughout Europe, with Bund yields lower by 1bp, as are French OAT’s.  Treasuries, on the other hand are unchanged in the session, trading right at 0.80%, which represents about a 7-basis point decline (bond rally) from last week’s levels.  There remains a huge amount of sentiment that the yield curve is going to steepen dramatically after the election as traders and investors anticipate a tsunami of bond issuance to fund the new Administration’s platform.  Of course, if the polls prove to be wrong, as they were in 2016, my sense is we could see a very sharp bond rally as the record short interest in bond futures gets quickly unwound.

Commodity prices, which yesterday were under pressure, and have seen oil trade well back below the $40/bbl level, are bouncing this morning, up ~1.0%, but looking through the rest of the complex, in base metals and ags, movement has been very modest and is mixed.

Finally, the dollar has turned from a dull opening, to some modest weakness overall.  NOK (+0.65%) is leading the way higher in the G10 space as it benefits from oil’s bounce.  However, after that, CAD (+0.3%) is the next biggest mover, also being helped by oil, and the rest of the bloc is +/- 0.2%, with no real stories to tell.  The pound, which has really done very little this month, continues to be whipsawed by Brexit headlines, although there is some positivity as both sides are meeting right now in London.

Emerging market currencies have two outliers this morning, ZAR (+0.75%) and TRY (-0.8%), with the rest of the bloc +/- 0.2% and very little of news to discuss.  If I had to characterize the market, it would be slightly dollar bearish, but in truth, the modesty of movement makes any judgement hard to offer.  As to the big movers, Turkey’s lira continues to suffer (-3.5% this week) as investors flee the country amid concerns the central bank has completely lost control of markets there, while President Erdogan continues his war of words with Europe and feels the sting of further sanctions.  On the flipside, ZAR is actually the leading gainer in the past week, as well as today, with hopes for positive budget news bolstering the demand for very high real yields.

Data today brings Durable Goods (exp 0.5%, 0.4% ex transport), Case Shiller Home Prices (4.20%) and Consumer Confidence (102.0).  With the Fed meeting next week, we have entered into the quiet period, so will not be hearing them castigate Congress for failing to pass a spending bill, although they all will be thinking it!  Across the pond, the ECB meets Thursday, and analysts are anticipating a strong signal that the ECB is going to increase monetary ease in December, yet another reason to be suspect of the collapsing dollar theory.  As for today, if the bulls can get the upper hand, then the dollar’s modest retreat thus far today can certainly extend.  But I don’t really see that happening, and think we see a bit of dollar strength before the session ends.

Good luck and stay safe
Adf

Naught Left to Wield

The PMI data revealed
The Continent’s yet to be healed
The second wave’s crest
Must still be addressed
And Christine has naught left to wield

It appears as though the market reaction function has returned to ‘bad news is good.’  This observation is based on the market response this morning, to what can only be described as disappointing PMI data from Europe and Japan, while we have seen equity markets higher around the world, bond yields generally declining and the dollar under pressure.  The working assumption amongst the investment community seems to be that as economic weakness, fostered by the much discussed second wave of Covid infections, spreads, it will be met with additional rounds of both fiscal and monetary stimulus.  And, this stimulus, while it may have only a marginal impact on economies, is almost certainly going to find its way into investment portfolios driving asset prices higher.

Unpacking the data shows that France is suffering the most, with Manufacturing PMI declining to 51.0 and Services PMI declining to 46.5, with both of those falling short of market expectations.  Germany, on the other hand, saw Manufacturing PMI rise sharply, to 58.0, on the back of increased exports to China, but saw its Services data decline more than expected to 48.9.  And finally, the Eurozone as a whole saw Manufacturing rise to 54.4 on the back of German strength, but Services fall to 46.2, as tourism numbers remain constrained, especially throughout southern Europe.

This disappointment has analysts reconfirming their views that the ECB is going to increase the PEPP by €500 billion come December, with many expecting Madame Lagarde to basically promise this at the ECB meeting next week.  The question is, will that really help very much?  The ECB has been hoovering up huge amounts of outstanding debt and there is no indication that interest rates on the Continent are going to rise one basis point for years to come.  In fact, Euribor rates fell even further, indicating literally negative concern about rates increasing.  And yet, none of that has helped the economy recover.  While the ECB will offer counterfactuals that things would be worse if they didn’t act as they have been, there is no proof that is the case.  Except for one thing, stock prices would be lower if they hadn’t acted, that much is true.  However, in their counterfactual world, they are focused on the economy, not risk assets.

The message to take away from this information is that the second wave of infections is clearly on the rise in Europe, (>217K new cases reported yesterday), and correspondingly as governments react by imposing tighter restrictions on activities, specifically social ones like dining and drinking, economic activity is going to slow.  At this point, estimates for Q4 GDP are already sliding back toward 0.0% for the Eurozone as a whole.

One last thing, the weakening growth and inflation impulses in Europe is a clear signal to…buy euros, which is arguably why the single currency is higher by 0.25% this morning.  Don’t even ask.

A quick look at the UK story shows PMI releases were also slightly worse than expected, but all well above the critical 50.0 level (Mfg 53.3, Services 52.3, Composite 52.9).  While these were softer than September’s numbers, they do still point to an economy that is ticking over on the right side of flat.  Retail Sales data from the UK was also better than expected in September, rising 1.6% in the month and are now up 6.4% Y/Y.  Despite all the angst over Brexit and the mishandling of the pandemic by Boris, the economy is still in better shape than on the Continent.  One other positive here is that the UK and Japan signed a trade deal last night, the UK’s first with a major country since Brexit.  So, it can be done.  Ironically, in keeping with the theme that bad news is good, the pound is the one G10 currency that has ceded ground to the dollar this morning, falling a modest 0.15%, despite what appear to be some pretty good headlines.

And that is pretty much the story this morning.  Last night’s debate, while more civil than the first one, likely did nothing to change any opinions.  Trump supporters thought he won.  Biden supporters thought he won.  Of more importance is the fact that the stimulus discussions between Pelosi and Mnuchin seem to be failing, which means there will be nothing coming before the election, and quite frankly, my guess is nothing coming until 2021 at the earliest.  If this is the case, the stock market will need to refocus on hopes for a vaccine, as hopes for stimulus will have faded.  But not to worry, there is always hope for something (trade deal anyone?) to foster buying.

So, let’s quickly tour markets.  Asian equities were generally on the plus side (Nikkei +0.2%, Hang Seng +0.5%), but Shanghai didn’t get the memo and fell 1.0%.  European indices have been climbing steadily all morning, with the DAX (+1.2%), CAC (+1.55%) and FTSE 100 (+1.7%) all now at session highs.  Meanwhile, US futures, which had basically been unchanged earlier in the session, are now higher by 0.3% to 0.5%.

Bond markets are actually mixed at this time, with Treasury yields edging ever so slightly higher, less than 1bp, with similar increases in France and Germany.  The PIGS, however, are seeing demand with yields there lower by between 1bp and 3bps.  As an aside, S&P is due to release their latest ratings on Italian debt, which currently sits at the lowest investment grade of BBB-.  If they were to cut the rating, there could be significant forced selling as many funds that hold the debt are mandated to hold only IG rated paper.  But it seems that the market, in its constant hunt for yield, is likely to moderate any impact of the bad news.

As to the dollar, it is broadly, but not steeply, weaker this morning.  AUD (+0.35%) is the leading gainer in the G10 bloc as copper prices have been rising on the back of increased Chinese demand for the metal.  Otherwise, movement in the bloc remains modest, at best, although clearly, this week’s direction has been for a weaker dollar.

In the emerging markets, most currencies are stronger, but, here too, the gains are not substantial.  HUF and CZK (+0.35% each) are the leaders, following the euro, although there is no compelling story behind either move.  The rest of the bloc is generally higher although we have seen some weakness in TRY (-0.35%) and MYR (-0.3%).  The lira is still suffering the aftereffects of the central bank’s surprise policy hold as many expected them to raise rates.  Rationale for the ringgit’s decline is far harder to determine.  One last thing, there was a comment from the PBOC last night indicating they were quite comfortable with the renminbi’s recent strength.  This helped support further small gains in CNY (+0.2%) and seems to give free reign for investors to enter the carry trade here, with Chinese rates substantially higher than most others around the world.

On the data front here, yesterday saw the highest Existing Home Sales print since 2005, as record low mortgage rates encourage those who can afford it, to buy their homes.  This morning brings the US PMI data (exp 53.5 Mfg, 54.6 Services), but recall, that gets far less traction than the ISM data which is not released until Monday, November 2nd.  As to Fed speakers, we are mercifully entering the quiet period ahead of the next FOMC meeting.  But the message has been consistent, more fiscal stimulus is desperately needed.

As the weekend approaches, I would not be surprised to see the dollar’s recent losses moderated as short-term traders take risk off the table ahead of the weekend.  At this point, having broken through a key technical level in EURUSD, I expect an eventual test of 1.20, but once again, I see no reason for a break there, nor expect that if the dollar does fall to that level, it will be the first steps toward the end of its status as a reserve currency.

Good luck, good weekend and stay safe
Adf

Concerns Within Europe

Concerns within Europe have grown
As surveys this morning have shown
Small businesses think
That many will sink
If Covid is not overthrown

The world seems a bit gloomier this morning as negative stories are gaining a foothold in investors’ minds.  Aside from the ongoing election and stimulus dramas in the US, and the ongoing Brexit drama in the UK/EU, concern was raised after a report was released by McKinsey this morning with results of a survey of SME’s in Germany, France, Italy, Spain and the UK.  Those results were not promising at all, as more than half of the 2200 companies surveyed in August expected to file for bankruptcy in the next year if revenues don’t increase.  More than 80% of those companies described the economy as weak or very weak.  If this survey is representative of SME’s throughout Europe, this is a very big deal.  SME’s (defined here as companies with less than 250 employees) employ over 90 million people in the EU.  Losing a large portion of those companies would be a devastating blow to the EU economy.  In fact, the IMF, which in its past had been the high priest of austerity for troubled nations, is now urging European (really all) countries to continue to spend any amount necessary to prevent businesses from collapsing.

This report serves as a fresh reminder of the remarkable contrast between market behavior and economic activity worldwide.  Not only is the current business situation tenuous, but prospects for the immediate future remain terrible as well.  And yet, equity markets worldwide have been able to look past the current economic devastation and rally on expectations of; 1) a blue wave in the US which will prompt massive stimulus spending; and 2) the quick and successful completion of Covid vaccine trials which will restore confidence in people’s everyday activities.  After all, if you were no longer concerned about getting infected with a deadly disease by a stranger, going to a movie, or taking a train or any one of a thousand different normal behaviors could be resumed, and the economy would truly start to rebound in earnest.

The question, of course, is how realistic are these assumptions underlying the market behavior?  Anecdotally, I have seen too many things to disrupt the idea of a blue wave and would question the accuracy of many of the polls.  Again, in 2016, Hillary Clinton was given a 98.4% probability of winning the election the day before voting, and we know how that worked out.  My point is, this race is likely significantly tighter than many polls reflect, yet markets do not seem to be taking that into account.  Secondly, vaccines typically take between four and five years to be created and approved, so expecting that a safe and effective vaccine will be widely available in a twelve-month timeline seems quite the stretch as well.  I understand technology has improved dramatically, but this timeline is extremely aggressive.  And this doesn’t even answer the question of how many people will take the vaccine, if it becomes available.  Remember, the flu vaccine, which is widely available, generally safe and constantly advertised, is only taken by 43% of the population.

The bigger point is that the market narrative has been very clear but could well be based on fallacious assumptions.  And looking at market behavior yesterday and today, it seems as though some of those assumptions are finally being questioned.

For instance, equity markets, after falling in the US afternoon on the back of worries that the Pelosi/Mnuchin stimulus talks are stalling, fell in Asia (Nikkei -0.7%, Shanghai -0.4%) ) although early losses in Europe have since been pared back to essentially flat performance.  US futures are pointing slightly lower, but only on the order of 0.1%-0.2%.  Aside from the negative tone of the McKinsey survey discussed above, GfK Consumer Confidence in Germany fell to -3.1, a bit worse than expected, and French Business Confidence indices all turned out lower than expected.  Again, evidence of a strong recovery in Europe remains hidden.

Bond markets remain disconnected from the equity sphere, at least from traditional correlations when discussing risk appetite.  While today has more characteristics of a risk-off session, and in fairness, 10-year Treasury yields have fallen 1 basis point, European government bond markets are selling off, with yields rising across the board.  Once again, the PIGS lead the way as Greece has seen its 10-year yield rise 20bps in the past week.  For a little perspective on 10-year yields, which have become a very hot topic as they traded through 0.80% two days ago, looking at a 5-year chart, the range has been 3.237%, in November 2018, to 0.507% this past August.  It is hard to get overly excited that yields are rising rapidly given the virtual flat line that describes the trend of the post Covid activity world.

Finally, the dollar, which has been under pressure this week overall, is seeing a little love this morning, having rallied modestly against most of the G10 as well as the EMG bloc.  Starting with emerging markets, the CE4 have been key underperformers with PLN (-0.4%), HUF (-0.4%) and CZK (-0.3%) following the euro lower.  Remember, these currencies tend to track the single currency quite closely, if with a bit more beta.  CNY (-0.4%) has also come under pressure, but given its performance over the past five months, this blip appears mostly as profit taking.  The only EMG currency in the green today is ZAR (+0.2%) which is most likely driven by ongoing interest in South African bond yields.

In the G10, SEK (-0.4%) is the laggard, although both GBP (0.3%) and EUR (-0.3%) are not far behind.  Swedish krona price action looks to be purely position related, as it has been among the best performers in the past week, so a little profit-taking seems in order.  As to the euro, we have already discussed the weak data and survey results.  And finally, the pound remains beholden to the Brexit negotiations, which while heavily hyped yesterday, seem to have found a few more doubters this morning, with a positive outcome not nearly so clear.

On the data front, this morning brings weekly Initial Claims (exp 870K) and Continuing Claims (9.625M) as well as Leading Indicators (0.6%) and Existing Home Sales (6.30M).  Last week’s Initial Claims data was disappointingly high, so this week’s results should get extra scrutiny with respect to the pace of any economic recovery.  As to the Home Sales data, Starts and Permits earlier in the week were solid, and record low mortgage rates, thanks to the Fed’s QE, continue to support housing, as does the flight to the suburbs from so many major urban areas.

From the Fed, it can be no surprise that uber-dove Lael Brainerd virtually demanded more federal stimulus in her comments yesterday, but that has been the theme from the Chairman on down.  Today we hear from three speakers, and it is almost certain that all three will maintain the new Fed mantra of, we will do what we can, but stimulus is necessary.

And that’s really it for the day.  If I had to guess, I expect there to be some positive stimulus headlines, although I doubt a deal will actually be reached.  But all the market needs is headlines, at least that’s all the algos need, so look for the dollar to give up its early gains on some type of positive news like that.

Good luck and stay safe
Adf

Deeper Downturn

There once was a virus that spread
Worldwide, leaving too many dead
Its summer vacation
Has led to frustration
That governments, people, misled

Now lockdowns have made a return
From London to Paris to Bern
And ECB voices
All highlight the choices
More QE or deeper downturn

As another week draws to a close, market activity has been relatively muted.  It seems that participants are biding their time waiting for an outcome on at least one of the big current stories.  Will Brexit talks continue and be successful or will Boris decide there is no chance and simply prepare for a no-deal outcome?  Will the second wave of Covid infections running rampant in Europe slow down, or will this wave be even larger than the first with a bigger negative impact on the economy?  And finally, what is going to happen in the US presidential election?

And let’s face it, those are three really big questions with no clear answers at this time.  But let’s quickly try to address them in order and see if we can discern potential market responses.

Brexit – we have already passed the deadline Boris had originally issued for a deal, although he has since recanted and said if the EU demonstrates they are interested in “intensifying” the talks, the UK will work even harder to reach a deal.  Unfortunately, the indications from the EU are less promising as French President Macron remains adamant that French fishing vessels have unfettered access to UK waters in any deal.  While there are signs the rest of Europe are annoyed with Macron over this stance, his unwillingness to compromise, as of yet, means there has been no movement.  The other sticking point, the level of UK state aid to its companies, seems much more tractable to solve. However, right now, no deal is in sight.

Trying to game out the market impact of this binary outcome is dependent on an estimate of what is currently priced into the market.  Several indicators, including CFTC positioning and some proprietary bank positioning indicators, show that the market remains net long Sterling.  As the pound appears overvalued at current levels, it seems the likelihood of a large rally in the event of a positive outcome is quite limited.  Rather, the future for the pound is likely lower.  In the event of a no-deal Brexit, a move toward 1.20 is quite realistic by year end.  Whereas, a positive outcome is more likely to see just a moderate, ‘sell the news’ response, perhaps back toward 1.25-1.28.

The second wave of infections is clearly a growing problem.  More localized lockdowns are being imposed in Germany, the Netherlands and Spain with talk of more coming in Italy and throughout Eastern Europe.  This is in addition to the curfew in Paris which is equally problematic.  Not surprisingly, ECB members have been vocal about the need and ability of the central bank to do even more, implying that the PEPP is going to get quite a boost by December.  Once again, I will highlight that the Fed has made it quite clear they have limited ability to do anything else, although they will certainly try, which means that on a relative basis, other countries are going to ease their monetary policy further.  In this case, that bodes ill for the future direction of the euro, which I think has every possibility of drifting back to 1.15 in the short run and 1.10 over time, ceteris paribus.

But the big ceteris is the US presidential election.  The polls point to a Biden victory, although I’m sure nobody has forgotten that the same polls pointed to a Clinton victory four years ago.  Betting markets are also leaning that way, although with far less confidence.  As to the market, based on my readings, it appears that a large majority of market participants agree with the polls and have positioned accordingly.  Remember, too, that control of Congress is a crucial point in anticipating any potential market movement.  So here goes:

Blue wave – Biden wins and Democrats retake Senate:  given the platform of much higher capital gains and corporate taxes and massive spending, equity markets seem likely to fall sharply this year as investors take profits at current tax rates, and the dollar to fall alongside them.  I would want to own gold in this scenario.

Biden win with Republican Senate:  much less impact as divided government gets less done.  Arguably, we will fund the budget on continuing resolutions for four years, rather than any big new programs getting enacted.  The market response here is likely to be far more benign, with range trading rather than steep trends.

Trump win with Democratic House:  No change to current situation means further efforts at tax cuts and deregulation, but unlikely to see tax hikes.  The US has the chance to be the cleanest shirt in the dirty laundry basket and draw in more investment and prop up dollar strength.

Trump win and Republican House (admittedly low probability):  dollar strength as US continues to focus on as much economic growth as possible, with more stimulus and more tax cuts.

At this point, all these questions remain open, but by New Year’s Eve, we will have answered at least two of the three for sure.

As to markets today, there is really very little to tell.  Equities in Asia were mixed (Nikkei -0.4%, Hang Seng +0.9%) but are performing well in Europe (DAX +1.1%, CAC +1.8%) as the ECB comments seem to have investors believing more stimulus is on its way.  US futures have edged higher in the past hour, but are still only pointing to gains of 0.2% or so.

Interestingly, bond markets are rallying with yields continuing their recent downtrend.  Treasury yields are lower by 1bp after having backed up a few yesterday afternoon.  European markets are seeing roughly 2 basis point declines across the board.  In fact, bunds are back at their lowest level (-0.635%) since the panic of late March when Covid first struck Europe.  Bonds there are certainly pricing in a slowing economy in the Eurozone.

Finally, the dollar is mixed.  Against its G10 counterparts, it is +/-0.2% with the Brexit story by far the most impactful.  GBP (-0.2% as I write) was higher by 0.3% just minutes ago, as it wiggles on each headline.  But the bloc is generally uninteresting.  As to emerging markets, it is largely the same story, with a pretty even mix of gainers and losers.  Here, though, the movement has been a bit larger with ZAR (+0.5%) the best performer, perhaps on strength in the metals markets, followed by CNY (+0.4%) where everyone is looking for strong GDP numbers on Monday.  On the downside, KRW (-0.4%) is bottom of the barrel today after a higher than expected Unemployment rate was reported.

Data this morning brings Retail Sales (exp 0.8%, 0.4% ex autos), IP (0.5%), Capacity Utilization (71.8%) and Michigan Sentiment (80.5).  Yesterday’s Initial Claims data was quite disappointingly high and bodes ill for the growth story here.  But in the end, the ongoing uncertainty and confusion over the three issues raised above imply a lack of direction in the near term, although choppiness could well be on the menu.

Good luck, good weekend and stay safe
Adf

Covid Comebacking

Investors are lately concerned
That risk is what needs to be spurned
With stimulus lacking
And Covid comebacking
The bulls are afraid they’ll get burned

Risk is starting to get a bad name for itself lately as we are heading into our third consecutive day of equity market selling and haven asset buying.  The twin stories of the resurgence in coronavirus cases throughout the world and the terminal diagnosis for additional US fiscal stimulus has many people rethinking the bullish case.  Perhaps the recovery won’t be V-shaped after all.

On the Covid front, as an example of new measures taken, the French government has set a 9:00pm – 6:00am curfew in Paris while the UK is imposing a ban on families from one household mixing with those from another as both nations try to cope with the increase in Covid cases.  (Yesterday, both countries reported 20,000 or more new cases).  And it’s not just those two nations, but the increase in numbers throughout the world is substantial.  India (68K), the US (60K), Brazil (27K) and Russia (14K) are all seeing higher reported infections with most of the rest of Europe also seeing increase in the 5K-10K region.  The data is certainly beginning to look like we are in the midst of a second wave of the disease.  Of course, the one truly noteworthy exception is Sweden, which never went through the lockdown phase, and has not reported any new cases in weeks.

Nonetheless, the fact that the virus is on the march again means that less economic activity will be taking place going forward, and that bodes ill for investors.  Adding to the Covid concerns are the recent announcements by several pharma companies that they are halting trials of their Covid vaccines as recipients got sick from various things. Overall, the Covid story is starting to weigh on investors’ (as well as politicians’) minds and that is undermining some of the previous bullishness on risk assets.

As to fresh fiscal stimulus from the US, it ain’t happening, at least not before the election.  Despite (because of?) all the rhetoric we continue to receive from the central banking and supranational communities about how crucial it is for more US stimulus aid to be injected into the economy, the politics at this point are quite clear.  Neither the Democrats nor the Republicans want to allow the other side to have a victory ahead of the election for fear it might help the other side in the election.  This is why the bills proposed by both the House and the Senate were so far apart; they were simply pandering to their respective political bases.  At the same time, the central bankers have essentially admitted that they have done all they can, and any further action on their part will help only at the very margins of the economy.  Although, further central bank stimulus would likely find its way into equity markets, it wouldn’t help Main Street in any way.

With these as the evolving narratives, it should be no surprise that risk is being shed.  It should also be no surprise that these losses are starting to gain some momentum.  For instance, European equities, as measured by the Eurostoxx 600, fell 0.6% on Tuesday, 0.25% yesterday, but are down a hefty 2.65% today.  And that pattern has been repeated across equity markets around the world.  In fact, Europe bourses today are all lower by between 2.0% and 3.0%.  US futures are also pointing to the same phenomenon, after seeing declines of between 0.6% and 0.8% yesterday, they are currently trading at levels between -1.0% (Dow) and -1.5% (NASDAQ).

Bond markets, which many believe have far better predictive capacity than equity markets with respect to the economy, are in a complete risk-off stance.  10-year Treasury yields, which just Friday appeared to be heading above 0.80%, are back down to 0.70%, having fallen 2.5 basis points overnight.  But it is even clearer in the European markets where the PIGS have each seen their bonds sold today with yields rising between 1 and 4 basis points, while Bunds (-3.8bps), Oats (-2.5bps) and Gilts (-4.1bps) are all seeing significant haven demand.  As I have written before, the reality is that government bonds issued by the PIGS are risk assets, not havens.  After all, do you think any of those four nations will ever be able to repay their debt?

Turning to the dollar, in true risk off fashion, it is the leading light in the currency market today.  In the G10 space, the best performers are CHF and JPY, both of which are essentially unchanged, while we are seeing NOK (-1.1%), AUD (-1.1%) and NZD (-0.75%) lead the way lower.  You will not be surprised to know that oil prices are lower this morning, with WTI and Brent both down by 1.6%, hence NOK’s troubles.  Too, other commodity prices, including the precious metals, are lower, which is clearly undermining the latter two.

One of the interesting things is the recent behavior of Aussie.  Historically, AUD has been almost a proxy on the Chinese economy, given the strong reliance on China for Australia’s economic growth.  Essentially, all the commodities Australia produced were ship north to the mainland.  But lately, there is a great deal of tension between the two nations as the Australians have called out the Chinese on issues like human rights and Hong Kong, and the Chinese have responded by imposing quotas on Australian goods and preventing state-owned companies from purchasing there.  Thus, despite the more positive economic data from China (last night saw CPI rise a less than expected 1.7% and expectations for Monday’s Q3 GDP data have risen to 5.5%), AUD has not been able to benefit. Adding to the Aussie’s woes were comments from the RBA regarding extending the tenor of QE purchases to the 10-year bucket and driving rates lower there.  Naturally, the market did the RBA’s work for it, and yields there fell 7.5 basis points.

Meanwhile, the euro and pound are both under pressure as well, just not as much, as investors continue to reduce exposures to both areas.

As to the EMG bloc, in a bit of a surprise, PLN (-1.1%) is the worst performer of the day, which seems to be on the back of a story about no additional Covid fiscal stimulus (and you thought that was a uniquely US phenomenon).  But ZAR (-1.0%) and MXN (-0.7%) are next in line, with both obviously feeling the pain of weaker commodity prices as well as increases in their Covid case count.  The rest of the bloc is also under pressure, just not quite to the same extent.  And as long as fear reigns, it will be difficult for these currencies to regain a bid.

On the data front, this morning brings Initial Claims (exp 825K), Continuing Claims (10.55M), Empire Manufacturing (14.0) and Philly Fed (14.8).  The Initial Claims data, while obviously well off the worst (highest) levels, has really started to plateau at much higher levels than the economy has ever seen before, which suggests that any rebound remains uneven and modest at best.  But while economic activity is clearly under pressure in the US, and we will see that spelled out in Q3 earnings data which has just started coming in, investor risk appetites, or lack thereof, will be the key driver for now, and that points to further gains in the dollar.  Maybe not huge, but that is the direction most likely.

Good luck and stay safe
Adf

Macron’s Pet Peeve

Each day from the UK we learn
The data implies a downturn
Infections keep rising
Yet what’s so surprising
Is Sterling, no trader will spurn

Investors, it seems, all believe
That fishing rights, Macron’s pet peeve
Will soon be agreed
And both sides proceed
Towards Brexit come this New Year’s Eve

Since the last day of September, the pound has been a top performer in the G10 space, rallying 2.0% despite the fact that, literally, every piece of economic data has fallen short of expectations.  Whether it was GDP, PMI, IP or Employment, the entire slate has been disappointing.  At the same time, stories about Brexit negotiations continue to focus on the vast gap between both sides on fishing rights for the French fleet as well as state aid limits for UK companies.  And yet the pound continues to grind higher, trading back to its highest levels in a month.  Granted this morning it has ceded a marginal -0.2%, but that is nothing compared to this steady climb higher.

It seems apparent that traders are not focusing on the macro data right now, but instead are looking toward a successful conclusion of the Brexit negotiations.  Granted, Europe’s history in negotiations is to have both (or all) sides agree at the eleventh hour or later, but agree, nonetheless.  So, perhaps the investor community is correct, there will be no hard Brexit and thus the UK economy will not suffer even more egregiously than it has due to Covid.  But even if a deal is agreed, does it make sense that the pound remains at these levels?

At this stage, the economic prospects for the UK seem pretty awful.  This morning’s employment report showed the 3M/3M Employment change (a key measure in the UK) falling 153K.  While that is not the worst reading ever, which actually came during the financial crisis in June 2009, it is one of the five worst in history and was substantially worse than market expectations.  Of greater concern was that the pace of job cuts rose to the most on record, with 114K redundancies reported in the June-August period.  Adding it all up leaves a pretty poor outlook for the UK economy, especially as further lockdowns are contemplated and enacted to slow the resurgence in Covid infections seen throughout various parts of the country.  And yet the pound continues to perform well.

Perhaps the rally is based on monetary policy expectations.  Alas, the last we heard from the Old Lady was that they were discussing how banks would handle negative interest rates, something which last year Governor Carney explained didn’t make any sense, but now, under new leadership, seems to have gained more adherents.  If history is any guide, the fact that the BOE is talking to banks about NIRP is a VERY strong signal that NIRP is coming to the UK in the next few months.  Again, it strikes me that this is not a positive for the currency.

In sum, all the information I see points to the pound having more downside than upside, and yet upside is what we have seen for the past several weeks.  As a hedger, I would be cautious regarding expectations that the pound has much further to rally.

Turning to the rest of the market, trading has been somewhat mixed, with no clear direction on risk assets seen.  Equity markets in Asia saw gains in the Hang Seng (+2.2%) although the Nikkei (+0.2%) and Shanghai (0.0%) were far less enthusiastic.  Interestingly, the HKMA was forced to intervene in the FX market last night, selling HKD6.27 billion to defend the strong side of the peg.  Clearly, funds are flowing in that direction, arguably directly into the stock market there, which after plummeting 27.5% from January to March on the back of Covid concerns, has only recouped about 42% of those losses, and so potentially offers opportunity.  Perhaps more interestingly, last night China reported some very solid trade data, with imports rising far more than expected (+13.2% Y/Y) and the Trade Balance falling to ‘just’ $37.0B.  Export growth was a bit softer than expected, but it seems clear the Chinese economy is moving forward.

European bourses, however, are all in the red with the DAX (-0.4%) and CAC (-0.3%) representative of the general tone of the market.  Aside from the weak UK employment data, we also saw a much weaker than expected German ZEW reading (56.1 vs. 72.0 expected), indicating that concerns are growing regarding the near-term future of the German economy.

In keeping with the mixed tone to today’s markets, Treasuries have rallied with yields falling 2 basis points after yesterday’s holiday.  Perhaps that is merely catching up to yesterday’s European government bond markets, as this morning, there is no rhyme or reason to movement in this segment.  In fact, the only movement of note here is Greece, which has seen 10-year yields decline by 3bps and which are now sitting almost exactly atop 10-year Treasuries.

As to the dollar, mixed is a good description here as well.  In the G10 space, given the German data, it is no surprise that the euro has edged lower by 0.2% nor that the pound has crept lower as well.  AUD (-0.24%) is actually the worst performer, which looks a response to softness in the commodity space.  SEK (+0.3%) is the best performer after CPI data turned positive across the board, albeit not rising as much as had been forecast.  You may recall the Swedes are the only country that had moved to NIRP and then raised rates back to 0.0%, declaring negative rates to be a bad thing.  The previous few CPI readings, which were negative, had several analysts calling for Swedish rates to head back below zero, but this seems to support the Riksbank’s view that no further rate cuts are needed.

Emerging market currencies are under a bit more pressure, with the CE4 leading the way lower (CZK -0.8%, PLN -0.7%, HUF -0.65%) but the rest of the bloc has seen far less movement, generally +/- 0.2%.  Regarding Eastern Europe, it seems there are growing concerns over a second wave of Covid wreaking further havoc on those nations inspiring more rate cuts by the respective central banks.  Yesterday’s Czech CPI data, showing inflation falling into negative territory was merely a reminder of the potential for lower rates.

Speaking of CPI, that is this morning’s lead data point, with expectations for a 0.2% M/M gain both headline and ex food and energy, which leads to 1.4% headline and 1.7% core on a Y/Y basis.  Remember, these numbers have been running higher than expectations all summer, and while the Fed maintains that inflation is MIA, we all know better.  I see no reason for this streak of higher than expected prints to be broken.  In addition, we hear from two Fed speakers, Barkin and Daly, but we already know what they are likely going to say; we are supporting the economy, but Congress needs to enact a fiscal support package, or the world will end (and it won’t be their fault.)

US equity futures are a perfect metaphor for the day, with DOW futures down 0.4% and NASDAQ futures higher by 0.9%.  In other words, it is a mixed picture with no clear direction.  My fear is the dollar starts to gain more traction, but my sense is that is not in the cards for today.

Good luck and stay safe
Adf

Some Despair

In Germany, data revealed
That growth there’s apparently healed
But data elsewhere
Implied some despair
As problems, porcine, are concealed

Risk is back in vogue this morning as the market appears to be responding positively to a much better than expected PMI reading from Germany (Services PMI 50.6, up from 49.1 Flash reading, Composite 54.7, up from 53.7 Flash) and a modestly better outcome for the Eurozone (48.0 vs. 47.6 for Services, 50.4 vs. 50.1 for Composite) as a whole.  At least that’s the surface story I keep reading.  The problem with this version is that markets in Asia were also highly risk-centric and that was well before the PMI data hit the tape.  Which begs the question, what is really driving the risk narrative today?

When President Trump was infected
The thing that most people expected
Was two weeks before
He’d walk out the door
Explaining he wasn’t affected

A different, and timelier, explanation for today’s positive risk sentiment stems from the ongoing story of President Trump’s covid infection and his ability to recuperate quickly.  While the standing assumption had been that there is a two-week timeline from infection to recovery, the President has consistently indicated that he feels fine, as have his doctors, and the story is that he will be released today from his weekend stay at Walter Reed Memorial Hospital.  In other words, any concerns that attended the announcement of his illness from Friday, when we did see equity markets suffer, is in the process of being unwound this morning.  The rationale here seems to be twofold.  First, the President is set to be back at the White House and in control, something which matters greatly from a national security perspective.  But second, the fact that he, as a 74-year-old man, was able to recover so quickly from the infection speaks to the reduced impact covid is likely to have on the population as a whole.  And arguably, that may even have a bigger impact.  While we continue to hear of new lockdown’s being announced in certain places, NYC, Spain and France to name just three, if the potency of the infection is waning such that it is a short-term event with limited side effects, that could well lead to an increase in confidence amongst the population.  And, of course, confidence is the one thing that the economy is searching for desperately.

The problem is that since virtually everything has become political theater lately, it is difficult to discern the facts in this situation.  As such, it seems hard to believe that overall confidence has been lifted that significantly, at least as of this morning.  However, if President Trump remains active and vigorous this week, it will certainly put a dent into the thesis that covid is incredibly debilitating.  We will need to watch how things evolve.

Interestingly, there is one issue that seems to be getting short shrift this morning, the growing concern that there will be no Brexit deal reached in the next ten days.  Recall that Boris and Ursula had a virtual lunch date on Saturday, and both claimed that a deal was close, but there were a couple of issues left to address.  The two key differences remain the issue of acceptable state aid by the UK government and, the big one, the type of access that European (read French) fishing vessels will have to UK waters.  It seems that French President Macron is adamant that the UK give the French a (large) annual quota and be done with it, while Boris is of the mind that they should agree to meet annually and discuss the issue based on the available fish stocks and conditions.  It also seems that the rest of Europe is getting a bit annoyed at Macron as for them, the issue is not that significant.  This fact is what speaks to an eventual climb-down by Macron, but, as yet, he has not been willing to budge on the matter.  Based on the price of the pound and its recent performance (+0.2% today, +1.0% in the past week), the market clearly believes a deal will be reached.  However, that also foretells a more significant decline in the event both sides fail to reach said agreement.

So, now let’s take a look at the bullishness in markets today.  Asia saw strength across the board with the Nikkei(+1.25%) and Hang Seng (+1.3%) nicely higher and Australia (+2.6%) really showing strength.  (China remains closed virtually all week for a series of national holidays).  European indices are all green as well, albeit not quite as enthusiastic as Asia.  Thus, we have seen solid gains from the three major indices, DAX, CAC and FTSE 100, all higher by 0.7%.  And finally, US futures are pointing to a stronger opening, with current pricing showing gains of between 0.7% and 1.0%.

It should be no surprise that bond marks are under some pressure with 10-year Treasury yields up to 0.71% this morning, higher by 1 basis point on the session and 6 bps in the past week.  In fact, yields are back at their highest level in a month.  European bonds are also broadly softer (higher yields) but the movement remains muted as well, about 1bp where they have risen.  And it should also not be surprising that Italy, Portugal and Greece have seen yields decline, as those three certainly qualify as risk assets these days.

Oil prices are firmer, again taking their cue from the confidence that is infusing markets overall, while precious metals prices are flat.  And finally, the dollar is definitely softer, except against the yen, which continues to be one of the best risk indicators around.  So, in the G10 space, NOK (+0.7%) is the leader, following oil as well as benefitting from the general dollar weakness.  Next on the list is CHF (+0.5%) where data showed ongoing growth in sight deposits, an indication that capital flows continue to enter the country, despite today’s risk attitude.  But broadly speaking, the whole space is firmer.

As to EMG currencies, ZAR (+0.7%) is the leader today, with firmer commodity prices and still the highest real interest rates around keeping the rand attractive in a risk-on environment.  But it is almost the entire bloc with the CE4 (CZK +0.55%, PLN +0.45%, HUF +0.45%) showing their high EUR beta characteristics and MXN (+0.45%) also performing well, again benefitting from both firmer oil prices as well as a weaker dollar.  The one exception here is RUB (-0.5%), which appears to be suffering from the effects of the ongoing conflict in Nagorno-Karabakh and how much it is going to cost Russia to maintain its support for Armenia.

On the data front, it is a relatively quiet week with only a handful of numbers to be released:

Today ISM Services 56.2
Tuesday Trade Balance -$66.2B
JOLTs Job Openings 6.5M
Wednesday FOMC Minutes
Thursday Initial Claims 820K
Continuing Claims 11.4M

Source: Bloomberg

However, what we lack in data we make up for with Fedspeak, as eight different speakers, including Chairman Powell tomorrow, speak at 13 different events.  What we have heard lately is there is a growing difference of opinion by some FOMC members regarding the robustness of the US economic rebound.  However, despite those differences, the universal request is for further fiscal stimulus.  Given the dearth of data this week, I expect that Chairman Powell’s speech tomorrow morning is likely to be the most important thing we hear, barring a Brexit breakthrough or something else from the White House.

Good luck and stay safe
Adf

Growth Has Now Faltered

The working assumption had been
That governments soon would begin
To lift their restrictions
Across jurisdictions
From Lisbon to well past Berlin
 
But Covid had other designs
By spreading, despite strict guidelines
So, growth has now faltered
And views have been altered
Regarding recovery times
 
Remember how smug so many publications around the world seemed when comparing the spread of Covid in the US and throughout Europe?  The narrative was that despite a devastating first wave in Italy and Spain, nations on the Continent handled the situation significantly better than the chaos occurring in the US.  Much was blamed on the different types of healthcare systems, and of course, there was significant opprobrium set aside for the US president. But a funny thing has happened to that narrative lately, and it was reinforced this morning by the preliminary PMI data that was released.  Suddenly, the growth in Covid cases throughout Europe is expanding to what seems very much like a true second wave, with France and Spain leading the way, each reporting more than 10,000 cases yesterday, while in the US, we continue to see a true flattening of the curve.  The discussion in many European countries is whether or not to impose a second lockdown, as governments there try to decide if their economies and budgets can withstand such an outcome.  (I don’t envy them their choice as no matter the outcome, some people will suffer and scream loudly about the decision.)
 
But a funny thing seems to be happening within economies, despite this government wariness to act, people are making the decisions for themselves.  And so, service businesses are seeing real declines in activity as people naturally avoid restaurants, travel and entertainment companies.  And that’s just what the data shows.  PMI Services surveys showed significantly worse outcomes in France (47.5 vs. 51.5 expected), Germany (49.1 vs. 53.0) and the Eurozone as a whole (47.6 vs. 50.6).  In other words, it appears that people are pretty good at self-preservation, and will not put themselves knowingly at risk without a good reason.  Getting a pint at the local pub is clearly not a good enough reason.
 
For elected policymakers, however, this is the worst of all worlds.  Not only does economic activity contract, for which they will be blamed, but they are not making the decisions for the people, which appears to be their primary motivation in so many cases.  Of course, there is a class of policymakers to whom this outcome is seen as a pure benefit…central bankers.  It is this group who gets to continue to preen about all they have done to support the markets economy, and while the Fintwit community blasts them regularly, the bulk of the population sees them as saviors.  Central banking continues to be a pretty good gig.  Lots of power, no responsibility.
 
Meanwhile, the investment community, including those blasting the central bankers on Fintwit, continue to take advantage of the ongoing central bank largesse and pump asset prices ever higher.  While there was a very short correction back at the beginning of the month, now that merely seems like a bad dream.  And if the data continues to turn lower, the one thing we know is that central banks will step further on the accelerator, announcing greater asset purchase programs, and potentially dragging a few more countries (is the UK next?) into the negative rate world.
 
But that is the world in which we live, whether or not we like it, or agree with the policies.  And as our focus is on markets, we need to be able to describe them and try to understand the evolving trends.  Today, and really this week, that trend continues to see the dollar grind higher despite the fact that we have seen both up and down equity market activity.  In other words, this does not appear to be simply a risk-off related USD rally.  Rather, this appears to be a USD rally built on short-term economic fundamentals.  Remember, FX is a relative game, and even if things in the US are not great, if they are perceived as better than elsewhere, that is sufficient to help drive the value of the dollar higher.  One other thing to note regarding the current market activity is that the hysteria over the dollar’s ‘imminent collapse’, which was all the rage throughout the summer, seems to have completely disappeared. 
 
So, turning to this morning’s session, we find equity markets in the green around the world.  Yesterday’s US rally was followed by a fairly dull Asian session (Nikkei -0.1%, Hang Seng +0.1%) but Europe has really exploded higher.  It seems that the weakening economic data has convinced investors the ECB will be even more active in their policy mix, thus adding more support to equity markets there.  Hence today’s gains (DAX +1.6%, CAC +1.8%, FTSE 100 +2.3%) are a direct response to the weaker data.  It appears we are in the bad news is good phase for investors.  Not to worry, US futures are also pointing higher, albeit not quite as aggressively as we are seeing in Europe.
 
Bond markets remain somnolent as 10-year Treasury yields are at 0.675%, essentially unchanged from yesterday and right in the middle of the tiny 7 basis point range we have seen since September 1st.  (For those of you who were disappointed the Fed did not announce yield curve control, the reason is that they already have it, there is no need to announce it!)  At the same time, German bunds are unchanged on the day, and also mired within a fairly tight, 10bp range.  But the ongoing winners are Italy and Greece, who have seen their 10-year yields decline by 2 and 3 basis points, respectively today, with Italy’s down more than 25 basis points since the beginning of the month.
 
The strong dollar is having a deleterious impact in one market, gold, which has fallen 0.4% today and is now lower by nearly 10% from the highs seen in early August.  The driving forces of the rally remain in place, with real rates still under pressure and inflation still percolating, but it was a very overcrowded trade that seems to be getting unwound lately.
 
Finally, a look at the dollar vs. its G10 brethren shows that commodity currencies are the worst performers today with AUD and NZD both lower by -0.6%, while NOK (-0.5%) and CAD (-0.2%) complete the list.  However, at this hour, the entire bloc is softer vs. the dollar.  In the emerging markets, one needn’t be prescient to have guessed that MXN (-0.85%) and ZAR (-0.75%) are the leading decliners given the combination of their recent volatility and connection to commodity prices.  RUB (-0.6%) is also a leading decliner, suffering from the commodity market malaise, but frankly, APAC and CE4 currencies are also somewhat softer this morning.  This is all about USD strength though, not specific currency story weakness.
 
On the data front, yesterday’s Existing Home Sales were right on the button at 6.0M, as I mentioned, the highest reading since the middle of 2007.  Today the only thing to see is Markit’s US PMI data, expected to print at 53.5 for Manufacturing and 54.5 for Services.  Given the European readings, it will be quite interesting to see if the same pattern is evolving here.
 
Yesterday we also heard from Chairman Powell, but all he said was that the Fed has plenty of ammo and has done a great job, but things would be better if Congress passed another fiscal stimulus bill.  No surprises there.
 
This morning’s USD strength, while broad-based, is shallow.  Perhaps the biggest thing working in the dollar’s favor right now is the size of the short-USD positioning and the fact that recent price action is starting to warm up the technicians for a more sustained move higher.  I think that trend remains but believe we will need to see some real confirmational data to help it extend.
 
Good luck and stay safe
Adf
 
 

A Tiny Tsunami

Covid’s wrought havoc
Like a tiny tsunami
Can Japan rebound?

In what is starting off as a fairly quiet summer morning, there are a few noteworthy items to discuss. It cannot be surprising that Japan’s economy suffered greatly in Q2, given the damage to economic activity seen worldwide due to Covid-19. Thus, although the -7.8% Q2 result was slightly worse than forecast, it merely served to confirm the depths of the decline. But perhaps the more telling statistic is that, given Japan was in recession before Covid hit, the economy there has regressed to its size in 2011, right after the Tohoku earthquake and tsunami brought the nation to its knees.

Back then, the dollar had been trending lower vs. the yen for the best part of the previous four years, so the fact that it dropped sharply on the news of the earthquake was hardly surprising. In fact, it was eight more months before the dollar reached its nadir vs. the yen (75.35), which simply tells us that the trend was the driver and the singular event did not disrupt that trend. And to be clear, that trend was quite steep, averaging nearly 11% per year from its beginning in 2007. In comparison, the current trend in USDJPY, while lower, is much less dramatic. Since its recent peak in June 2015, the entire decline has been just 15.5% (~3.2% per annum). Granted, there have been a few spikes lower, most recently in March during the first days of the Covid panic, but neither the economic situation nor the price action really resembles those days immediately after Tohoku.

The point is, while the dollar is certainly on its back foot, and the yen retains haven status, the idea of a dollar collapse seems far-fetched. I’m confident that Japan’s Q3 data will show significant improvement compared to the Covid inspired depths just reported, but given the massive debt overhang, as well as the aging demographics and trend growth activity in the country, it is likely to be quite a few years before Japan’s economy is once again as large as it was just last year. Ironically, that probably means the yen will continue to trend slowly higher over time. But even getting to 100 will be a long road.

The other interesting story last night was from China, where the PBOC added substantially more liquidity to the markets than had been anticipated, RMB 700 billion in total via one-year injections. This more than made up for the RMB550 billion that is maturing over the next week and served as the catalyst for the Shanghai Exchange’s (+2.35%) outperformance overnight. This merely reinforces the idea that excess central bank liquidity injections serve a singular purpose, goosing stock market returns supporting economic activity.

There is something of an irony involved in watching the central banks of communist nations like China and Russia behave as their actions are essentially identical to the actions of central banks in democratic nations. Is there really any difference between the PBOC injecting $100 billion or the Fed buying $100 billion of Treasuries? In the end, given the combination of uncertainty and global ill will, virtually all that money finds its way into equity markets, with the only question being which nation’s markets will be favored on any given day. It is completely disingenuous for the Fed, or any central bank, to explain that their activities are not expanding the current bubble in markets; they clearly are doing just that.

But the one thing of which we can be certain is that they are not going to stop of their own accord. Either they will be forced to do so after changes in political leadership (unlikely) or the investment community will become more fearful of their actions than any possible inaction on their parts. It is only at that point when this bubble will burst (and it will) at which time central banks will find themselves powerless and out of ammunition to address the ensuing financial distress. As to when that will occur, nobody knows, but you can be certain it will occur.

And with that pleasant thought now past, a recap of the overnight activity shows that aside from Shanghai, the equity picture was mixed in Asia (Nikkei -0.8%, Hang Seng +0.6%) while European bourses are similarly mixed (DAX +0.2%, CAC 0.0%, Spain’s IBEX -0.75%). US futures are modestly higher at this point, but all well less than 1%. Bond markets are starting to find a bid, with 10-year Treasuries now down 1.5 basis points, although still suffering indigestion from last week’s record Treasury auctions. And in fact, Wednesday there is another huge Treasury auction, $25 billion of 20-year bonds, so it would not be surprising to see yields move higher from here. European bond markets are all modestly firmer, with yields mostly edging lower by less than 1bp. Commodity markets show oil prices virtually unchanged on the day while gold (and silver) are rebounding from last week’s profit-taking bout, with the shiny stuff up 0.5% (AG +2.1%).

Finally, the dollar is arguably slightly softer overall, but there have really been no large movements overnight. In G10 world, the biggest loser has been NZD (-0.3%) as the market voted no to the announcement that New Zealand would be postponing its election by 4 weeks due to the recently re-imposed lockdown in Auckland. On the plus side, JPY leads the way (+0.25%, with CAD and AUD (both +0.2%) close by on metals price strength. Otherwise, this space is virtually unchanged.

Emerging markets have had a bit more spice to them with RUB (-1.25%) the outlier in what appears to be some position unwinding of what had been growing RUB long positions in the speculative community. But away from that, HUF (-0.6%) is the only other mover of note, as investors grow nervous over the expansion of the current account deficit there.

This week’s data releases seem likely to be less impactful as they focus mostly on housing:

Today Empire Manufacturing 15.0
Tuesday Housing Starts 1240K
  Building Permits 1320K
Wednesday FOMC Minutes  
Thursday Initial Claims 915K
  Continuing Claims 15.0M
  Philly Fed 21.0
Friday Manufacturing PMI 51.8
  Services PMI 51.0
  Existing Home Sales5.40M  

Source: Bloomberg

Of course, the FOMC Minutes will be greatly anticipated as analysts all seek to glean the Fed’s intentions regarding the policy overhaul that has been in progress for the past year. Away from the Minutes, though, there are only two Fed speakers, Bostic and Daly. And let’s face it, pretty much every FOMC member is now on board with the idea that raising the cost of living inflation is imperative, and that if inflation runs hot for a while, there is no problem. Clearly, they don’t do their own food-shopping!

It is hard to get too excited about markets one way or the other today, but my broad view is that though the medium-term trend for the dollar may be lower, we continue to be in a consolidation phase for now.

Good luck and stay safe
Adf

Hard to Believe

As travel restrictions expand
And quarantines spread ‘cross the land
It’s hard to believe
That we’ll soon achieve
A surge to pre-Covid demand

Risk is having a tough day today as new travel restrictions announced by the UK, regarding travelers from France and the Netherlands, as well as four small island nations, has raised the specter of a second wave of economic closures. In fact, while the headlines are hardly blaring, the number of new infections in nations that had been thought to have achieved stability (Germany, France, Spain and New Zealand) as well as those that have never really gotten things under control (India, Brazil and Mexico) indicates that we remain a long way from the end of the pandemic. Given the market response to this news, it is becoming ever clearer that expectations for that elusive V-shaped recovery have been a key driver to the ongoing rebound in risk appetites worldwide.

However, most recent data has pointed to a slowing of economic activity in the wake of the initial bounce. Exhibit A is China, where Q2 GDP grew a surprising 3.2%, but where the monthly data released last evening showed IP (-0.4% YTD) and Retail Sales (-9.9% YTD) continue to lag other production indicators. The very fact that Retail Sales continues to slump is a flashing red light regarding the future performance of the Chinese economy. Remember, they have made a huge effort to convert their economy from a highly export-oriented one to a more domestic consumer led economy. But if everyone is staying home, that becomes a problem for growth. And the word is, at least based on several different BBG articles, that many Chinese are reluctant to resume previous activities like going out to dinner or the movies.

The upshot is that the PBOC will very likely be back adding stimulus to the economy shortly, after a brief hiatus. Since it bottomed at the end of May, the renminbi had rallied 3.35%, and engendered stories of ongoing strength as the Chinese sought to reduce USD utilization. A big part of that story has been the idea that China has left the pandemic behind and was set to get back to its days of 6% annual GDP growth. Alas, last night’s data has put a crimp in that story, halting the CNY rally, at least for the moment.

But back to the broader risk picture, which shows that equity markets in Europe are suffering across the board (DAX -1.3%, CAC -2.0%, FTSE 100 -2.1%) as not only has the UK quarantine news shocked markets, but the data continues to be abysmal. This morning it was reported that Eurozone employment had fallen 2.8% in Q2, the largest decline since the euro was born in 1999, and essentially wiping out 50% of all jobs created during the past two decades. Meanwhile, Eurozone GDP fell 12.1% in Q2 and was lower by 15% on a year over year basis last quarter. While the GDP outcome may have been forecast by analysts, it remains a huge gap to overcome for the economies in the Eurozone and seems to have forced some reconsideration about the pace of future growth.

And perhaps, that is today’s story. It seems that there is a re-evaluation of previous assumptions regarding the short-term future of the global economy. US futures are pointing lower although are off their worst levels of the overnight session. Treasury yields, after rising sharply yesterday in the wake of a pretty lousy 30-year auction, have fallen back 2.5 basis points to 0.70%, still well above the lows seen two weeks ago, but unappetizing, nonetheless. Commodity prices are slipping with both oil (-0.5%) and gold (-0.4%) a bit lower. And the dollar is modestly firmer along with the yen, an indication that risk is under pressure.

In the G10, aside from the yen, which seems clearly to be benefitting from today’s risk mood, the pound has actually edged a bit higher, 0.3%, after comments by the UK’s chief Brexit negotiator, David Frost, indicated his belief a deal could be reached by the end of September. Meanwhile, NOK (-0.5%) is the worst performer in the bloc as the decline in oil prices has combined with a strong weekly performance driving profit-taking trades and pushing the currency back down. The rest of the bloc is broadly softer, but the movement has been modest at best.

In the EMG space, there are more losers than gainers with RUB (-0.6%) not surprisingly the laggard, although TRY (-0.5%) continues to demonstrate how to destroy a currency’s value with bad policymaking. The rest of the space is generally softer by much smaller amounts and there has only been one gainer, PHP (+0.2%) which, remarkably, seems to be benefitting from the idea that the central bank is openly monetizing debt. Historically, this type of activity, especially in emerging market economies, was seen as a disaster-in-waiting and would result in a much weaker currency. But apparently, in the new Covid age, it is seen as a mark of sound policy.

A quick diversion into debt monetization and the potential consequences is in order. By this time, MMT has become a mantra to many who believe that inflation is a thing of the past and without inflation, there is no reason for governments that print their own currency to ever stop doing so, thus supporting economic activity. But I fear that view is hugely mistaken as the lessons learned from the economic response to the GFC are not applicable here. Back then, all the new liquidity that was created simply sat on bank balance sheets as excess reserves at the Fed. Very little ever made its way into the real economy. Obviously, it did make it into the stock market.

But this time, there is not merely monetary support, but fiscal support, with much of the money being spent by those recipients of the $1200 bonus check, the $600/week of topped up Unemployment benefits, and the $billions in PPP loans. At the same time, factory closures throughout the nation have reduced the production of ‘stuff’ while government restrictions have reduced the availability of many services (dining, movies, health clubs, etc.) Thus, it becomes easy to see how we now have a situation where a lot more money is chasing after a lot less stuff. Yes, the savings rate has risen, but this is a recipe for inflation, and potentially a lot of it. MMT proponents claim that inflation is the only thing that should moderate government spending. But ask yourself this question, is it realistic to expect the government to slow or stop spending just because inflation starts to rise? Elected officials will never want to derail that gravy train, despite the consequences. And while MMT is not official policy, it is certainly a pretty fair description of what the Fed is currently doing, buying virtually all the new Treasury debt issued. Do not be surprised when next month’s CPI figures are higher still! And the month after…

Anyway, this morning brings Retail Sales (exp +2.1%, +1.3% ex autos) as well as Nonfarm Productivity (1.5%), Capacity Utilization (70.3%), IP (3.0%), Business Inventories (-1.1%) and finally, Michigan Sentiment (72.0). Retail Sales will get all the press. A soft number is likely to enhance the risk-off mood and help the dollar edge a bit higher, while a strong print should give the bulls a renewed optimism with the dollar suffering as a consequence.

Good luck, good weekend and stay safe
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