Amid Hyperbole

When Two Thousand Twenty began
The narrative with which we ran
Explained Trump and Xi
Were ‘bout to agree
On terms for a new trade game plan

The deal was agreed and then signed
But Covid infected mankind
Economies tanked
The market got spanked
And trade thoughts were soon left behind

So please tell me how it can be
That trade is now, quite suddenly
The reason that bulls
Are grabbing handfuls
Of risk amid hyperbole

As if to prove there is nothing new under the sun, the recent equity/risk rally is ostensibly based on the fact that the US-China phase 1 agreement, you remember the one signed back on January 15th of this year, is being enforced and followed by both sides.  It seems that good vaccine news is suffering from the law of diminishing returns, so a new story was needed to support the bull case.  Hence, news that there was a video conference between Messrs. Lighthizer, Mnuchin and He was quickly trotted out to show that all the benefits of the trade deal are still set to accrue to the US.  (It is coincidences like this one that encourage the conspiracy theorists in the world.)  At any rate, ostensibly, the result of the conversation was that both sides are fully committed to adhering to the deal, which basically means that China will be purchasing huge amounts of agricultural products from the US for the rest of the year.  Now, given that China is facing serious food shortages with food prices rising rapidly throughout the country, this shouldn’t be all that surprising.  And yet, this is the alleged impetus to go out and buy the FANGMAN group of stocks, none of whom sell as much as a single ear of corn.  Go figure!

Perhaps, however, I am being too hasty in describing the trade story as the driver of risk.  After all, it could be that German GDP ‘only’ fell -9.7% in Q2, not the -10.1% initially estimated.  Or perhaps it was the good news from Norway, where GDP was a surprisingly robust -6.3% in Q2.  If that doesn’t fit the bill, we should look to the UK, where the CBI Retailing Sales report fell back to -6, rather than rising to +6 as forecast.  I mean, isn’t this the type of news that quickens investors’ hearts?

Obviously, the point remains that the dichotomy of ongoing asset market rallies alongside ongoing economic distress has yet to change.  And while there is no question that markets are forward looking constructs, their recent ability to ignore significantly distressing economic situations and assume that economies will be returning to pre-pandemic levels of activity sooner, rather than later, is truly impressive.  Perhaps that will be the case, but as I highlighted yesterday, it may well be the most severe case of ‘buy the rumor, sell the news’ in the history of markets when that occurs.  Remember, if economies are ticking over nicely again, what rationale is there for central banks to continue to add liquidity to markets?  Why would interest rates remain pegged at 0.0% worldwide amid economic growth?  These are questions which will be much more difficult for the bulls to answer in the future, but for now, there is no need to do so.

And so, risk is rising again this morning.  We saw it in Asia, where the Nikkei (+1.35%) performed quite well, although both the Hang Seng (-0.25%) and Shanghai (-0.35%) couldn’t really get going.  European bourses, on the other hand, are uniformly green this morning, with both the DAX and CAC higher by 0.75% as I type.  And US futures have been steadily climbing all evening and are now pointing to gains of ~0.5% on the opening.

Perhaps the better risk gauge, though, is the bond market, where Treasury yields have backed up a further 3.7 basis points this morning and are pushing toward 0.70%.  Similarly, we are seeing significant selling pressure across all European government bond markets, with Bunds (+5.4bps) and Gilts (+3.7bps) having trouble finding buyers. Perhaps what is even more interesting is that Italian BTP’s (+7.1bps) are performing worst of all.  But more than simply risk-on is at work here.  In addition, we are seeing an uptick in the supply of bonds throughout the continent, and despite the ECB’s ongoing purchases, subscription rates for the new paper is falling to lower than expected levels with coverage ratios below 2.0.  I think Madame Lagarde will need to rev up the ECB’s purchases even more, which will, coincidentally, help prevent the euro from rallying too far as well.

Speaking of the euro, it has managed to trade higher by 0.3% amid broad-based dollar weakness today.  Given the news out of the Eurozone has been anything but bullish, the single currency’s strength is likely to be attributed to the dollar’s decline.  For instance, the pound has rallied 0.55% despite, arguably, worse economic data.  While NOK (+0.7%) has been leading the way in the G10 space.  Perhaps that GDP data was seen as a positive!  Confirming the idea that today is a risk-based session, the yen is the only currency weaker than the dollar, and substantially so, having fallen 0.5% thus far.  As there was no data or news overnight, the risk framework is the most likely explanation for the move.

EMG currencies have also benefitted from the risk framework today, although aside from ZAR (+1.0%) the movement has been less significant, with most currencies rising on the order of 0.25%-0.35%.  The ZAR story continues to be driven by the highest real yields available these days, and in times of limited risk concern, that is extremely attractive.

As I didn’t cover the upcoming data yesterday, let’s see what is on tap for the rest of the week:

Today Case Shiller Home Prices 3.60%
Consumer Confidence 93.0
New Home Sales 790K
Wednesday Durable Goods 4.5%
-ex Transport 1.9%
Thursday Initial Claims 1.0M
Continuing Claims 14.4M
Q2 GDP -32.5%
Friday Personal Income -0.3%
Personal Spending 1.5%
Core PCE Deflator 1.2%
Chicago PMI 52.5
Michigan Sentiment 72.8

Source: Bloomberg

Of course, despite some important data, notably the ongoing Initial Claims story, in truth, all eyes will be on Chairman Powell who speaks Thursday morning at 9:15am NY at the virtual Jackson Hole gathering.  Expectations are high that he will be explaining the Fed’s newly developed views on how they are going to manage monetary policy, and more importantly, on how they are going to view their inflation target going forward.  The consensus view is we will be moving to an average inflation target of 2.0%, meaning if inflation runs hot for a while after it has run cold for a while, they will not feel compelled to act to try to moderate it.  Given that inflation has run cold for the past decade, at least based on the way they measure it, get ready for much higher inflation in your everyday lives going forward.

And that’s really it for the day.  It strikes me that the risk-on narrative is weak this morning, and it wouldn’t surprise me to see the dollar claw back its early losses before we end the day.

Good luck and stay safe

Destined to Suck

Remember when everyone said
That Europe’s response was ahead
Of that in the States
Well turns out the rates
Of growth, have in Europe, gone red
Plus, all of that talk of the buck
And how it was destined to suck
Well don’t write it off
Though it’s seen a trough
The bulls might soon find they’re in luck

By definition, the market narrative is difficult to rewrite.  It tends to be an evolutionary affair, something that helps to describe the zeitgeist of a particular point in time and the collection of data and comments that are most frequently highlighted and discussed at that time.  Examples are; as long as the Fed keeps printing money, equities can only go higher, or Europe handled the Covid pandemic much better than the US and so the euro will continue to rally as economic activity returns more quickly to the Continent than to the States.

About that second one…  it seems that perhaps the narrative may have gotten a bit ahead of itself.  The formulation of that narrative was based on the initial infection data, where there is no question that the US found itself with a larger infection count.  Meanwhile, draconian measures taken throughout much of Europe, after serious problems appeared in Italy, Spain and Germany, appeared to have been pretty successful in moderating the impact.  The price of those policies was made evident in Q2 GDP data, where the US, despite its horrific -9.5% quarterly result, actually outperformed even the best in Europe, Germany’s -10.2%, let alone the -12.5% to -18.7% declines seen in France, Italy and Spain.

But the working assumption was that was the nadir, and that as most of Europe had begun to reopen, things were destined to steadily get better.  Alas, this morning’s flash PMI data seems to tell a different story.  The reality is that the burgeoning second wave in Europe, where infection numbers have been increasing in all the major nations as restrictions were relaxed, has created a hiccup.  For instance, French Manufacturing PMI fell more than expected and back to 49.0, signaling contraction not growth.  Services PMI there remained above 50 but fell more than 5 points to 51.9.  These are not numbers that suggest robust economic activity.  We saw a similar outcome in Germany, with Services PMI also falling 5 points to just 50.8, although Manufacturing actually improved slightly, to 53.0 from last month’s reading of 51.0.  Overall in the Eurozone, the Services situation has deteriorated significantly, with the bloc-wide Services PMI falling to 50.1 and implying that both Italy and Spain were likely below 50.0.  Let me simply say that the narrative has “some ‘splainin’ to do”1.

Interestingly, the UK data was quite a contrast, with flash Manufacturing PMI there rising to 55.3 and Services data jumping to 60.1.  Once again, the narrative, which continues to harp on how awful things are in the UK, on what a terrible job Boris has done and how Brexit will be the death of the economy, seems to be at odds with the data.

Now, one month does not a trend make, but it certainly requires a re-evaluation of the narrative.  And that is what we are seeing this morning, and arguably what we have seen the past couple of sessions.  The euro, which just two days ago was threatening to trade above 1.20 for the first time since May 2018, is now below 1.1800 and down 0.6% on the day.  Seemingly, what we are witnessing is the combination of the most overcrowded trade (long euros/short dollars) and data releases that are directly at odds with the underlying thesis.  Of course, it is possible that later this morning, when Markit releases the US PMI data (exp 52.0 Mfg, 51.0 Services), that it too disappoints, and the euro’s losses will be unwound.  But for now, short dollar positions have to be getting a bit more uncomfortable.

Of course, there is something else we need to consider with the euro, and that is the ECB.  Yesterday’s release of the ECB Minutes from their July meeting explained that not only would the ECB purchase all the bonds authorized under the PEPP, but that they would consider doing far more as well.  And remember, if you think that the ECB is going to sit by and watch the euro rally indefinitely, undermining the export performance of the Eurozone economy, you are clearly mistaken.  The very last thing Madame Lagarde wants to see is the euro booming.  Remember, despite the flowery rhetoric regarding inflation and unemployment that comes from all G10 central banks, beggar thy neighbor currency policy remains a key policy initiative for every one of them, the Fed included.  

And so, with this as backdrop, a quick tour of the markets shows that the risk meme is difficult to assess right now.  Equity markets in Asia were modestly higher (Nikkei +0.2%, Shanghai +0.5%) but those in Europe are flat to modestly lower (DAX 0.0%, CAC -0.1%, FTSE 100 -0.1%).  Meanwhile, US futures are softening as I type, but the damage is 0.25% or less at this time.  Bond markets continue to see inflows as yields throughout the world edge lower. Treasuries and Bunds have both rallied such that yields have declined 1.5 basis points, and we have seen similar movement in the UK despite the release of data showing that the UK’s debt load has risen above £2 trillion for the first time and the debt/GDP ratio is now above 100%.

Commodity prices continue to chop a great deal but have not really gone anywhere.  This morning, oil is lower by a bit more than 1%, but it is actually slightly higher on the week.  Gold too, is a bit softer this morning, but basically back to where it started out on Monday.  Overall, there has been no real directional information coming from this sector.

As to the dollar, it is definitely having another good day in the markets.  Only JPY (+0.15%) and NZD (+0.1%) have managed to hold their own vs. the greenback today with the rest of the G10 lower.  The fact is, there is no real explanation in either of these currencies to describe their modest strength, other than position modification into the weekend.  Meanwhile, SEK (-0.7%) has been the worst performer after data showed that Industry Capacity fell to a record low, and far worse than expected 82.8%.

EMG currencies are also under pressure this morning with the CE4 bearing the brunt of the fall (HUF -1.2%, PLN -0.8%, CZK -0.7%).  Asian currencies saw much less movement, with the entire space +/- 0.25% as several countries in the region celebrated obscure holidays.  However, I can assure you that if the dollar has found a short-term bottom, these currencies are destined to suffer as well.

And that’s really it as we head into the weekend.  Aside from the PMI data, we see Existing Home Sales (exp 5.41M) at 10:00 and there are no Fed speakers on the docket.  So, once again the FX markets are likely to take their cues from the equity space, and if futures are pointing the way, a bit more USD strength is in order.

Good luck, stay safe and good weekend


  1. For those unfamiliar with I Love Lucy, I can only suggest you watch reruns on Netflix.  It is one of the all-time greatest sitcoms and the source of the phrase.