Tag Archives: #dollar

All Stressed

Posted on by

It started in China’s Great Plains
Where factories for supply chains
Were built wall to wall
But now they have all
Been shuttered to stop Covid’s gains

However, the sitch has regressed
While China, their data’s, repressed
Thus Covid’s now spreading
And everywhere heading
No shock, stocks worldwide are all stressed

I know each and every one of you will be incredulous that the G20 meeting of FinMins and central bankers this weekend in Saudi Arabia was not enough to stop Covid-19 in its tracks. I certainly was given the number of statements that we have heard in recent weeks by central bankers explaining that if the virus spreads, they will save the day!

But clearly, whatever power monetary or fiscal power has, it is not well placed to solve a healthcare crisis that is rapidly spreading around the world. This weekend may well have been the tipping point that shakes equity investors out of their dream-induced state. While the steady growth in numbers of infections and fatalities in China remains constant, something which seems to have been accepted by investors everywhere, the sudden jump in Covid cases in South Korea and, even more surprisingly, in Italy looks to have been just the ticket to sow doubt amongst the bullish investment set. And just like that, as markets are wont to do, fear is the primary sentiment this morning.

A quick market recap shows that equity markets worldwide have been decimated, although Europe (DAX -3.5%, CAC -3.5%, FTSE 100 -3.2%, FTSE MIB (Italy) -4.6%) has felt the brunt more than Asia (Nikkei -0.4%, Hang Seng -1.8%, Kospi -3.9%, Shanghai -0.3%). And US futures? Not a pretty picture at this point, with all three down more than 2.5% as I type.

Benefitting from the risk-off sentiment are Treasury bonds (yields -8bps to 1.39%) and bunds (-6bps to -0.50%), while the barbarous relic itself is up 2.4% to $1682/oz. And you thought gold was no longer important!

Finally, in the currency markets, the dollar is king once again, gaining against all comers but one, quite sharply in some cases. The yen has regained some of its haven status, rallying 0.25% this morning, although it remains far lower than just last Thursday. But the rest of the G10 is under pressure with NOK (-1.0%) falling the most as oil prices (WTI -4.0%) are getting crushed today. By contrast, CAD (-0.45%) seems almost strong in the face of the weakness in oil. But aside from the yen, the rest of the bloc is lower by at least 0.25%, and there is nothing ongoing in any of these nations that is driving the story, this is pure risk aversion.

In the EMG space, the story is more of the same, with the entire space lower vs. the dollar today although the biggest losers may be a bit of a surprise. Pesos are feeling the heat with both Mexico (-1.2%) and Chile (-1.1%) the worst performers in the space. The latter is a direct response to the weakness in copper prices, while the former has multiple problems, with oil’s decline just the latest. In fact, since last Thursday morning, the peso has fallen nearly 3.0% as we are beginning to see the very large long MXN carry position start to be unwound. It seems that long MXN had the same perception amongst currency investors as long the S&P had for equity investors. The thing is, at least according to the CFTC figures from last week, there is still a long way to go to reach neutrality. We are still more than 12% from the peso’s all-time lows of 22.03 set in early 2017, but if Covid continues to evade control, look for that level to be tested in the coming months (weeks?).

And that’s today’s story really. There are some political issues in Germany, as the ruling CDU finds itself in the middle of a leadership contest with no clear direction, while Italy’s League leader, Matteo Salvini, is hurling potshots at the weakened Giuseppe Conti government. But even under rock solid leadership, the euro would be lower this morning as would each nation’s stock market. Perhaps of more concern is the news that China, despite the ongoing spread of Covid-19, was relaxing some of its quarantine restrictions as it has become clearer by the day that the economic impact on the mainland is going to be quite substantial. President Xi cannot afford to have GDP growth slow substantially as that would break his tacit(?) deal with the people of more government control for continued material improvement. It has been a full month since virtually anything has been happening with respect to manufacturing throughout China and we are seeing more and more factories elsewhere (South Korea, Eastern Europe) shut down as supply chains have broken. Shipping rates have collapsed with more than 25% of pre-Covid activity having disappeared. This will not be repaired quickly I fear.

Turning to the data, which is arguably still too early to really reflect the impact of the virus, this week brings mostly secondary numbers, although we do see core PCE, which is forecast to have increased by a tick.

Tuesday Case-Shiller Home Prices 2.85%
  Consumer Confidence 132.1
Wednesday New Home Sales 715K
Thursday Q4 GDP 2.1%
  Durable Goods -1.5%
  -ex transport 0.2%
  Initial Claims 211K
Friday Personal Income 0.4%
  Personal Spending 0.3%
  Core PCE 0.2% (1.7% Y/Y)
  Chicago PMI 46.0
  Michigan Sentiment 100.7

Source: Bloomberg

Of course, the Fed has made it quite clear that they have an entirely new view on inflation, namely that 2.0% is the new 0.0%, and that they are going to try to force things higher for much longer to make up for their internally perceived failures of reaching this mythical target. We all know that the cost of living has risen far more rapidly than the measured inflation statistics, but that does not fit into their models, nor does it given them an excuse to continue to pump more liquidity into markets. In fact, it would not be that surprising to see them double down if today’s declines continue for several days. After all, that would imply tightening financial conditions.

But for now today is the quintessential risk-off day. Look for the dollar to remain king while equities fall alongside Treasury yields.

Good luck
Adf

Set For Stagnation

Posted on by

When thinking of every great nation
Regarding its growth expectation
The US alone
Is like to have grown
While others seem set for stagnation

The upshot of these circumstances
Is regular dollar advances
Within the G10
It’s euros and yen
That suffer on policy stances

Another day, another dollar rally. This simple sentiment pretty well sums up what we have been seeing for the past several weeks. And while there may be a multitude of catalysts driving individual currency movements, the reality is they all point in the same direction, a stronger dollar. Broadly speaking, data from around the world, excluding the US, has been consistently weaker than expected while the US continues to hum along nicely. Now, if China’s economy remains in its current catatonic state for another month, one has to believe that US numbers are going to suffer, if only for supply chain reasons. But right now, it is difficult for anyone to make the case that another currency is better placed than the dollar.

For example, last night we saw Australian Unemployment unexpectedly rise to 5.3% as the first measured impacts of Covid-19 make themselves felt Down Under. Traders wasted no time in selling Aussie and here we are this morning with the currency lower by 0.75%, trading to new lows for the move and touching its lowest level since March 2009. Perhaps the Lucky Country has run out of luck.

The yen keeps falling
Like ash from Fujiyama
Is an end in sight?

At this point in the session, the yen has seen its largest two-day decline since November 2016, in the immediate wake of President Trump’s election, and has now fallen more than 2.0% since Tuesday morning. It has broken through a key technical level at 111.02, which represented a very long-term downtrend line. This has encouraged short-term traders to add to what is believed to be significant outflows from Japanese investors, notably insurance companies. One of the other interesting things is that Japanese exporters, who are typically sellers of USDJPY, seem to be sitting this move out, having filled orders at the 110 level, and are now apparently waiting for 115. While it is unlikely that we will see the yen continue to decline 1% each day, I have to admit that 115 seems quite realistic by the end of the Japanese fiscal year next month.

And those are just two of the many stories that seem to be coming together simultaneously to encourage dollar buying. Other candidates are ongoing weak Eurozone economic data (Eurozone Construction output falling and reduced forecasts for tomorrow’s flash PMI data), rate cuts by EMG central banks (Indonesia cut by 25bps last night), and more confusion from China regarding Covid-19 and its spread. Last night, they changed the way they count infections for the second time in a week, and shockingly the result was a lower number indicating the spread of the disease is slowing. However, at this point, the virus count seems to be having less of a market impact than little things like the announcement that Hubei province is keeping all factories shuttered until at least March 10. Now I don’t know about you, but that hardly seems like the type of thing that indicates things are getting better there.

There is a new tacit contest in the market as well, trying to determine just how big a hit the Chinese economy is going to take in Q1. If you recall two weeks ago, the initial estimates were that GDP would grow at a 4%-5% rate in Q1. At this point 0.0% seems a given with a number of analysts penciling in negative growth for the quarter. And folks, I don’t know why anyone would think there is going to be a V-shaped recovery there. It is going to take a long time to get things anywhere near normal, and there has already been a lot of permanent demand destruction. On top of that, one of the things I had discussed last week, the idea that even if companies aren’t generating revenue, they still need to pay interest on their debt, is starting to be seen more publicly. The news overnight that HNA Group, a massively indebted conglomerate that had acquired trophy assets all around the world (stakes in Hilton Hotels and Deutsche Bank amongst others) is unable to pay interest on its debt and seems to be moving under state control. While the PBOC cut rates slightly overnight, the one-year loan prime rate is down to 4.05% from 4.15% previously, it appears that the Chinese government is going to be fighting the Covid-19 fight with more fiscal measures than monetary ones. That said, the renminbi has been falling along with all other currencies and has traded back through 7.00 to the dollar after a further 0.35% decline overnight.

The point is that you can essentially look at any currency right now and it is weaker vs. the dollar. Each may have its own story to tell, but they all point in the same direction.

I would be remiss to ignore other markets, which show that other than Chinese equity markets (Shanghai +1.85%), which rallied last night after news of further stimulus measures, risk is mostly on its back foot today. European equity markets are generally lower (DAX -0.1%, CAC -0.1%) although not by much. US futures are pointing lower by 0.2% across the board, again, not significant, but directionally the same message. Treasury yields continue to fall, down another 2bps this morning to 1.54%, and gold continues to rally, up another 0.3% this morning.

Yesterday’s FOMC Minutes explained that the Fed was pretty happy with current policy settings, something we already knew, and that they are still unsure how to change their ways to try to be more effective with respect to achieving their inflation target as well as insuring that there are no more funding crises. On the data front, yesterday’s PPI data was much firmer than expected, although most people pretty much ignore those numbers. Today we see Philly Fed (exp 11.0), Initial Claims (210K) and Leading Indicators (0.4%). Monday’s Empire Mfg data was stronger than expected and the forecasts for Philly Fed are for a solid increase. Yet again, the data picture points to a better outcome in the US than elsewhere, which in the current environment will only encourage further USD buying. For now, don’t get in front of this train, but if you need to hedge receivables, sooner is better than later as I think we could see this run for a while.

Good luck
Adf

Simply Too Fraught?

Posted on by

The question whose answer is sought
‘Bout what should be sold or be bought
Is will GDP
Rebound like a V
Or are things just simply too fraught?

Risk is neither on nor off this morning as investors and traders continue to sift through both the recent changes in coronavirus news from China and the economic releases and choose a direction. Thus far this morning, that direction is sideways.

In one way, it is a bit surprising there is not a more negative viewpoint as on top of the surge in reported cases of Covid-19 (the coronavirus’s official name), we have heard of more companies closing operations outside of China for lack of parts. The latest is Fiat Chrysler, which closed a manufacturing facility in Serbia due to its inability to source parts that are built in China. While the Chinese government is seemingly trying to get everyone to believe that things are going to be back to normal soon, manufacturers on the ground there who have reopened, are running at fractions of capacity due to an inability of workers to get to the plant floor. Huge swaths of the country remain in effective lockdown, and facemasks, which are seen as crucial to getting back to work, are scarce. Apparently, the capacity to make face masks in China is just 22 million/day. While that may sound like a lot, given everyone needs a new one every day, and that there are around 100 million people under quarantine (let alone 1.3 billion in the country), there just aren’t enough to go around. I remain skeptical that this epidemic will come under any sense of control for a number of weeks yet, and that ultimately, the hit to global economic growth will be far more severe than the market is currently pricing.

Another sign of trouble came from Germany this morning, where Q4 GDP was released at 0.0% taking the annual growth rate to 0.6% in 2019. Eurozone GDP turned out to be just 0.9% in 2019, and that was before the virus was even discovered. In other words, it appears that both those numbers are going to be far worse in Q1 as the Eurozone remains highly reliant on exports to grow, and as the Fiat news demonstrates, exports are going to be reduced.

Keeping this in mind, it is easy to understand why the euro remains under so much pressure. While its decline this morning is just 0.1%, to 1.0830, the euro is trading at its lowest level vs. the dollar since April 2017. The single currency has fallen in 9 of the past 10 sessions and is down 2.4% this month. And let’s face it, on the surface; it is awfully difficult to make a case for the euro to rebound on its own. Any strength will require help from the dollar, meaning either weaker US economic data, or more aggressive Fed policy ease. At this point, neither of those looks likely, but the impact of Covid-19 remains highly uncertain and can easily derail the US economy as well.

But for now, the narrative remains that Chinese GDP growth in Q1 will be hit, but that by Q2 things will be rebounding and this will all fade from memory akin to the SARS virus in 2003. Just remember, China has effectively been closed since January 23, three full weeks, or 6% of a full year. While manufactured goods demand will certainly rebound, there are many services that simply will never be performed and cannot be recouped. The PBOC is already tweaking leverage policies on property lending in an effort to help further support growth going forward, and there is discussion of allowing banks to live with a greater proportion of non-performing loans that are due to the coronavirus. One can only imagine all the garbage loans that will receive that treatment!

Switching to a view of the markets, equity markets are +/- 0.2% generally speaking with US futures in a similar position. Treasury yields have fallen back a few bps, giving up yesterday’s modest gains, and the FX market, on the whole, is fairly benign. Away from the euro’s small decline this morning, we are seeing slight weakness in the pound, Aussie and Kiwi, with the rest of the G10 doing very little. The one gainer today is CAD, +0.15%, which seems to be benefitting from WTI’s ongoing bounce from Monday’s low levels, with the futures contract there higher by 1.4%.

In the EMG space, ZAR is today’s big winner, up 0.65%, in response to President Cyril Ramaphosa’s State of the Nation speech, where he outlined steps to help reinvigorate growth and fix some of the bigger problems, like the state-owned power producer Eskom’s debt issues. Of course, speeches are just that and the proof will be in what policies actually get implemented. The other key gainers here are BRL (+0.6%), which saw the central bank (finally) intervene yesterday to try to stop the real’s dramatic recent plunge (it had fallen more than 4% in the past 10 days and nearly 10% in 2020 so far). After announcing $1 billion in swaps, the market turned tail and we are seeing that continue this morning. HUF also continues to benefit, rallying a further 0.55% this morning, as the market continues to price in growing odds of a rate hike to help rein in much higher than expected inflation.

On the data front, this morning brings Retail Sales (exp 0.3%, 0.3% ex autos) as well as IP (-0.2%), Capacity Utilization (76.8%) and Michigan Sentiment (99.5). Yesterday’s CPI data was a touch firmer than forecast, simply highlighting that the Fed’s measure of inflation does not do a very good job. Also yesterday, we heard from NY Fed President Williams who told us the economy is in a “very good place”, while this morning we hear from uber-hawk Loretta Mester. This week the doves have all cooed about letting inflation run hot and cutting if necessary. Let’s hear what the hawks think.

So as we head into the weekend, I expect traders to reduce positions that have worked as the potential for a weekend surprise remains quite large, and nobody wants to get caught. That implies to me that the dollar can soften ever so slightly as the day progresses.

Good luck
Adf

Coming Up Short

Posted on by

All week what the market has said
Is fears in re China are dead
But last night it seems
The latest of memes
Showed fear is still somewhat widespread

This morning the payroll report
If strong, ought, the dollar, support
The US this week
Has been on a streak
While Europe keeps coming up short

After a week where early fears about the spread of the coronavirus morphed into a belief that any issues would be contained and have only a short term impact on the global economy, it seems that some investors and traders are having second thoughts. For the first time since last Friday, equity markets around the world have fallen, albeit not very far, and risk is starting to be unloaded. Certainly, this could well be short-term profit taking. After all, since Friday’s close on the S&P 500, the index was higher by nearly 4% as of last night, and pretty much in a straight line. The remarkable thing about the equity rally, which was truly global in nature, was that it very studiously ignored the ongoing growth of the epidemic and its economic impacts.

Last night, however, it seems the announcements by Toyota and Honda that they would extend their mainland Chinese factory shutdowns by another week, as well as the force majeure declarations by Chinese energy and copper companies have served to highlight just how severely economic activity in China is slowing. Alas, the human impact continues its steady climb higher, with more than 600 deaths now attributed to the virus and more than 31,000 cases confirmed. It certainly appears as the situation has not yet reached anything near a peak, which implies that more market impacts are still to come.

One of the things we are beginning to see is a more significant reduction in expectations for Chinese economic activity this year. Last night, several more analysts reduced their expectations for Q1 GDP growth there by more than 2%. Given the fact that China has quarantined some 90 million people at this point, which is a remarkable 6.5% of the population, I expect that before all is said and done, Q1 GDP growth in China is going to be much lower, probably on the order of 2% annualized. In fact, I would not be surprised if the Chinese don’t release a Q1 number at all. There is precedent for this as just last night, the customs administration there announced that there would be no January trade data release, and that the numbers would be merged with February’s data to smooth out the impact of the Lunar New Year. Assuming the virus situation is under control by the end of Q1, it would be well within the Chinese prerogative to do the same with that data, hopefully masking just how bad things were.

In the end, there was nothing positive to be learned from Asia last night, which was confirmed by weakness in both equity markets throughout the region as well as the FX markets, where every currency in the APAC group fell. And all of this movement is directly attributable to the virus story.

Moving westward to Europe, things are looking no better there this morning, with equity markets lower across the board and their currencies also under pressure. NOK is the worst performer, down 0.6% as fears over further weakness in the oil market are weighing on the currency. But, the euro is feeling more heat today as well; down 0.25% after IP data from everywhere in the Eurozone was markedly disappointing. Germany (-3.5%), France (-2.8%), Spain (-1.4%) and the Netherlands (-1.7%) demonstrated that a risk of a recession remains quite real on the continent. In fact, you may recall how Germany barely dodged that recession status in Q4, when GDP rose 0.1% in a bit of a surprise. Well, right now, Q1 looks like it is going to be negative again. It seems to me that if a country has three negative GDP prints in six quarters, with the other three quarters printing around +0.1%, that could easily be defined as a recession. But regardless of how it is described in print, the reality is that Germany has not come out of its funk yet, and it may be dragging the rest of Europe down with it.

But there is something else ongoing in the euro which is likely to have been a significant part of the currency’s recent weakness. Recall that LVMH has agreed to buy Tiffany’s for ~$16.5 billion. Well, LVMH issued both EUR (7.5 billion) and GBP (1.5 billion) bonds this week to pay for the purchase, which means that there was a massive conversion in both currencies that is a one-way flow. And as large as these markets are, a significant dollar purchase like that is going to have a major impact. As I wrote earlier this week, the euro is leaning heavily on support at 1.0950, and if it manages to break through, there is nothing technically in the way until 1.0850. If you are a payables hedger, this could be an excellent opportunity.

Turning to the US, this morning is payrolls day. After Wednesday’s blowout 291K number for ADP Employment, expectations are running high that things are going to be quite good. The current median forecasts are as follows:

Nonfarm Payrolls 165K
Private Payrolls 155K
Manufacturing Payrolls -2K
Unemployment Rate 3.5%
Average Hourly Earnings 0.3% (3.0% Y/Y)
Average Weekly Hours 34.3
Participation Rate 63.2%

Source: Bloomberg

A quick look at the revisions in NFP estimates since the ADP number shows that the average is now 180K. As I said, expectations are running high. And given the strength of US data we have seen all week, if we do get a strong number, I expect to see the dollar break higher, likely taking out technical resistance in a number of currencies.

To recap, we have a risk-off session leading up to a key economic indicator. It will be interesting to see if strong US data can offset the growing fear of further negative news from china, but ironically, I think that the dollar is likely to be in demand regardless of the outcome. A weak number implies a potential negative impact from the virus, and risk-off which helps the dollar. A strong number means that the US remains above the fray, and that US investments are poised to continue to lead the world, thus drawing in more dollar buyers. Either way, the dollar seems primed to rally further today.

Good luck and good weekend
Adf

Strength in Their Ranks

Posted on by

Around the world, all central banks
Are to whom we need to give thanks
By dint of their easing
All shorts they are squeezing
Who knew they’d such strength in their ranks?

Every day that passes it becomes clearer and clearer that central banks truly are omnipotent. Not only do they possess the ability to support economies (or at least stock markets), but apparently, easing monetary policy cures the coronavirus infection. Who knew they had such wide-ranging powers? At least that is certainly the way things seem if you look through a market focused lens.

Let’s recap:

Date # cases / # deceased S&P 500 Close 10-Year Treasury EURUSD USDJPY
31 Dec 1 / 0 3230 1.917% 1.1213 108.61
6 Jan 60 / 0 3246 1.809% 1.1197 108.37
10 Jan 41 / 1 3265 1.82% 1.1121 109.95
20 Jan 219 / 3 3320 1.774% 1.1095 110.18
22 Jan 500 / 17 3321 1.769% 1.1093 109.84
24 Jan 1320 / 41 3295 1.684% 1.1025 108.90
28 Jan 4515 / 107 3276 1.656% 1.1022 109.15
30 Jan 7783 / 170 3283 1.586% 1.1032 108.96
3 Feb 17,386 / 362 3248 1.527% 1.1060 108.69
4 Feb 24,257 / 492 3297 1.599% 1.1044 109.59

Sources: https://www.pharmaceutical-technology.com/news/coronavirus-a-timeline-of-how-the-deadly-outbreak-evolved/and Bloomberg

Now obviously, they are not actually creating a medical cure for this latest human affliction (I think), but once it became clear that the coronavirus was going to have a significant impact on the Chinese, and by extension, global economies, they jumped into action. While it was no surprise that the PBOC immediately eased policy to head off an even larger stock market rout upon the (delayed) return from the Lunar New Year holidays, I think there was a larger impact from Chairman Powell, who at the Fed press conference last week, made it clear that the Fed stood ready to react (read cut rates) if the coronavirus impact expanded. And then, just like that, the coronavirus was relegated to the agate type of newspapers.

What is really amazing is how the narrative has been altered from, ‘oh my gosh, we are on the cusp of a global pandemic so sell all risky assets’ to ‘the flu is actually a much bigger problem globally and this coronavirus is small potatoes and will be quickly forgotten, so buy those risky assets back’.

The point here is that market players lead very sheltered lives and really see the world as a binary function, is risk on or is risk off? And as long as the central banks continue to assure traders and investors that they will do whatever it takes to prevent stock markets from declining, at least for any length of time, those central banks will continue to control the narrative.

So, with that as preamble, what is new overnight? In a modest surprise, at least on the timing, the Bank of Thailand cut rates by 25bps to a record low 1.00%. The stated reason was as a prophylactic to prevent economic weakness as the coronavirus spreads. Too, the MAS explained that they have plenty of room to ease policy further (which for them means weakening the SGD) if they deem the potential coronavirus impacts to call for such action. It should be no surprise that SGD is today’s weakest link, having fallen 0.75% but we also saw immediate weakness in THB overnight, with the baht falling nearly 1.0% before a late day recovery on the back of flows into the Thai stock exchange. As to the rest of the EMG space, PHP is also modestly weaker after the central bank there indicated that they would cut rates as needed, but we have seen more strength across the space in general. RUB is leading the pack, up 0.8% on the back of a strong rebound in oil prices (WTI +2.3%), but we are also seeing strength throughout LATAM as CLP (+0.7%), BRL (+0.55%) and MXN (+0.4%) all rebound on renewed risk appetite. ZAR has also had a banner day, rising 0.7% on the positive commodity tone to markets.

In the G10 space, things are a bit less interesting. It should be no surprise that AUD is the top performer, rising 0.4%, as it has the strongest beta relationship to China and risk. NOK is also gaining, +0.25%, with oil’s recovery. On the other side of the blotter, CHF (-0.3%) and JPY -0.15%, but -1.0% since yesterday morning) are taking their lumps as haven assets no longer hold appeal to the investment community. This idea has been reinforced by the 10-year Treasury, which has seen its yield rise from 1.507% on Friday to 1.63% this morning.

And don’t worry, your 401K’s are all green again today with equity markets around the world back on the elevator to the penthouse.

Turning to today’s US session, we start to get some more serious data with ADP Employment (exp 157K), the Trade Balance (-$48.2B) and ISM Non-Manufacturing (55.1). Earlier this morning we saw Services PMI data from both Europe and the UK. Eurozone PMI data was mixed (France weak and Italy strong), while the UK saw a strong rebound. We also saw Eurozone Retail Sales, which were quite disappointing, falling 1.6% in December, and seemingly being the catalyst for the euro’s tepid performance today, -0.2%. Remember, Monday’s US ISM data was much better than expected, and there is no question that the market is willing to believe that today’s data will follow suit.

In sum, continued strong performance by the US economy, at least relative to its peers, as well as the working assumption that should the data start to falter, the Fed will be slashing rates immediately, will continue to support risk assets. At this point, that seems to be taking the form of buying high yield currencies (MXN, ZAR, INR) while buying the dollar to increase positions in the S&P500 (or maybe just in Tesla ). As such, I look for the dollar to hold its own vs. the bulk of the G10, but soften vs. much of the EMG bloc.

Good luck
Adf

Investors Remain Unconcerned

Posted on by

There once was a time in the past
When market bears quickly amassed
Positions quite short
While they would exhort
Investors, their holdings, to cast

But these days the story has turned
So bears that go short now get burned
A global pandemic?
It’s just academic
Investors remain unconcerned

One has to be impressed with the current frame of mind of global investors as they clearly feel bulletproof. Or perhaps, one has to be impressed with the job that central bankers around the world have done to allow those feelings to exist.

The coronavirus is quickly becoming back page news, where there will be a tally of cases and deaths daily, morphing into weekly, as the investment community turns its attention to much more important things, like how many new streaming customers each of the streaming services picked up in Q4. It seems the fact that China’s economy is going to feel some extreme pain in Q1 is being completely dismissed. At least from the market’s perspective. And this is where the central banks get to take a bow. It turns out that overwhelming liquidity support is all one needs to make people forget about everything else. It is truly the opioid of the market masses.

So as you sit down this morning you will see that equity markets around the world are on a tear higher, with every market that has been open today in the green, most by well more than 1%. And don’t worry; US futures are all more than 1% higher as well. Everything is clearly fantastic!

Last night, the PBOC fixed the renminbi more than 0.5% stronger than the market would have indicated, thus demonstrating they would not let things get out of hand. Then after a weak opening, where equity indices there fell more than 2%, the government stepped in along with official buyers and turned the tide higher. Once this occurred, equity markets elsewhere in Asia took their cues and everything rallied. Risk was no longer anathema and we have seen that across all assets as havens come under pressure and other risk assets, notably oil has rebounded. The lifecycle of a negative event has grown increasingly shorter as central banks continue to demonstrate their willingness to do ‘whatever it takes’ to prevent a sell-off of any magnitude in any equity market.

This is not just a US phenomenon, but a global one. To me the question is: Is this peak financialization of the global economy? By that I mean are we now in a period where the real economy, the one where cars and other stuff are manufactured and food is grown, has become completely secondary to the idea that companies that do those things need to be entirely focused on their capital structure to be sure that they are appropriately overleveraged? While I recognize that I am old-fashioned in my thoughts, I cannot help but believe that we are going to see a pretty significant repricing of assets at some point in the not too distant future. In truth, despite the market’s insouciance with regard to the ongoing coronavirus outbreak, it is entirely possible that it continues to expand for several more months and that China, the second largest economy in the world and one representing 16% of total global economic activity, does not grow at all in Q1 while supply chains are closed and manufacturing around the world grinds to a much slower pace. Many recessions have been born of less than that. Just remember, trees don’t grow all the way to the sky, and neither do economies!

So let’s turn back to the other things ongoing in this morning’s session. Broadly speaking, the dollar is under modest pressure along with Treasury bonds and the Japanese yen. After all, safe havens do not boost your returns when Tesla is rallying 20% a day! There has been limited data today (Italian CPI +0.5% Y/Y) so FX markets are watching equities. Yesterday saw a big surprise in the US ISM data, which printed above 50 for the first time since July and has a number of analysts reconsidering their forecasts for slowing growth. The dollar definitely responded to this yesterday, rallying across the board as Fed funds futures backed off taking the probability of a rate cut by the Fed in July down to 85%. Remember, Friday that was at 100%.

Yesterday also saw the pound suffer significantly as the initial saber rattling by both the UK and the EU continued, which helped push the pound back to its key support level of 1.2950-1.3000. But as I said yesterday, this is simply both sides trying to get an advantage in the negotiation. While anything is possible, I continue to believe that a deal will be reached, or at the very least that a delay agreed on a timely basis. Boris is not going to jeopardize his power on this principle, remember he’s a politician first, and principles for them are fluid.

In the EMG bloc, pretty much every currency has rallied today as investors have quickly returned to those currencies with either higher yields (ZAR +0.6%, MXN +0.5%) or the best prospects assuming the coronavirus situation quickly dissipates (KRW +0.6%, CLP +0.6%, THB +0.5%). And in truth, I don’t think it’s any more complicated than that.

In the US this morning we see December Factory Orders (exp 1.2%), generally not a major data point. There are no Fed speakers scheduled today which means that FX is going to be a secondary story. All eyes will be on equity markets and I expect that as risk assets are acquired, the dollar (and yen and Swiss franc) will continue to soften slowly.

Good luck
Adf

Just Look What You’ve Wrought!

Posted on by

On Monday it seems we all thought
That crises were sold and not bought
On Tuesday we learned
Those sellers got burned
Chair Powell; just look what you’ve wrought!

hubris: noun
hu·bris | \’hyü-brƏs \
Definition of hubris : exaggerated pride or self-confidence
Example of hubris in a sentence
//It takes remarkable hubris to survey the ongoing situation regarding the 2019-nCoV virus and decide that Monday’s 1.5% decline in the S&P 500 was a buy signal.

I saw a note on Twitter this morning that really crystalized the current market condition. All prices are based on flow, not value. It is a fool’s errand to try to determine what the underlying value of any financial asset is these days, as it has no relevance regarding the price of that asset. This is most evident in the equity markets, but is equally true in the currency markets as well. So for all of us who are trying to determine what possible future paths are for market movements, the primary focus should be on how favored they are, for whatever reason, compared to the rest of the investment universe. In fact, this is the key outcome of the financialization of the global economy. And while this is just fine, maybe even great, when flows are driving equity prices, and other assets, higher, it will be orders of magnitude worse going the other way.

But the bigger issue is the financialization of the economy. Prior to the financial crisis and recession of 2008-2009, there seemed to be a reasonable balance between finance and production within the global economy. In other words, financial questions represented a minority of the impact on how companies were managed and on how much of anything was produced. This balance, which I would have put at 80% production / 20% finance, give or take a nickel, was what underpinned the entire economics profession. Finance was simply a relatively small part of every productive endeavor with the goal of insuring production could continue.

But in the wake of that recession, the fear of allowing massively overpriced markets to actually clear resulted in central banks stepping in and essentially taking over. The initial corporate reaction was to take advantage of the remarkably low interest rates and refinance their businesses completely. The problem was that since markets never cleared, there was still a dearth of demand on an overall basis. This is what led to a decade of subpar growth. Remember, the average annual GDP growth in the decade following the GFC was about 1.5%, well below the previous decade’s 3.0%. At the same time, the ongoing shortening of attention spans, especially for investors, forced corporate management to figure out how to make more money. Unfortunately, the fact that slow GDP growth prevented an actual increase in profits forced senior management to look elsewhere. And this is when it quickly became clear that levering up corporate balance sheets, while ZIRP and NIRP were official policy, made a great deal of sense. If a company couldn’t actually make more money, it sure could make it seem that way by issuing debt and buying back stock, thus reducing the denominator in the key metric, EPS.

And that is where we are today, in an economy that continues to grow at a much slower pace than prior to the financial crisis, but at the same time allows ongoing growth in a key metric, EPS, through financial engineering.

Which brings me back to the idea of flow. It is financial flows that determine the future paths of all assets, so the more money that is made available by the central banking community (currently about $100 billion per month of new cash), the higher the price assets will fetch. Let me say that they better not stop providing that new cash anytime soon.

With that as a (rather long) preamble, today’s market discussion is all about the Fed. This afternoon at 2:00 we will get the latest communique and then Chairman Powell will meet the press at 2:30. Current expectations are for no policy changes although there seems to be a growing view that the ongoing coronavirus situation, and its likely negative impact on Chinese/global GDP growth, will force a more dovish hue to both the statement and the press conference. Remember, the Fed is currently going through a major policy review, similar to that of the ECB, as they try to determine what tools are best to manage the economy achieve their mandated goals going forward. Given that ongoing policy review, it would take a remarkable catalyst to drive a near-term policy change, and apparently a global pandemic doesn’t rise to that standard.

Oh yeah, what about that coronavirus? Well, the death toll is now above 130, and the number of cases is touching 10,000, far more than seen in the SARS outbreak of 2003. (And I ask, if so many are skeptical of Chinese economic data, why would we believe that this data is accurate, especially as it would not reflect China in a positive light?) At any rate, while the Hang Seng fell sharply last night, its first session back since last week, the rest of the global equity market seems pretty comfortable. And hey, Apple earnings beat big time (congrats), so all is right with the world!!

What will this do to flows in the FX market? Broadly speaking, the dollar continues to see small gains vs. its G10 brethren as US rates remain the highest around. Granted Canadian rates are in the same place, but with oil’s recent decline, and growing concern over the housing bubble in Canada’s main cities, it seems like the dollar is safer to earn those rates. At the same time, many emerging markets currently carry rates that are far higher than in the US, and what we saw yesterday was significant interest in owning those currencies, especially MXN, RUB, BRL and COP, all of which gained between 0.5% and 1.0% in yesterday’s session. While those currencies have edged lower this morning, the flow story remains the key driver, and if markets maintain their hubris, the carry trade will quickly return.

On the data front, yesterday’s US Consumer Confidence number was much better than expected at 131.6. This morning we saw slightly better than expected GfK Consumer Confidence in Germany (9.9 vs. 9.6 exp) and better than expected French Consumer Confidence (104 vs 102). That is certainly a positive, but it remains to be seen if the spread of the coronavirus ultimately has a negative impact here. Ahead of the Fed, there is no important US data, so we are really in thrall to the ongoing earnings parade until Chairman Powell steps up to the mic. As to the dollar, it continues to perform well, and until the Fed, that seems likely to continue.

Good luck
Adf

Don’t Be Fooled

Posted on by

Said Christine Lagarde, don’t be fooled
That we’re on hold can be overruled
If data gets worse
Or else the reverse
Then our policies can be retooled

Madame Lagarde was in fine fettle yesterday between her press conference in Frankfurt following the ECB’s universally expected decision to leave policy unchanged, and her appearance on a panel at the WEF in Davos. The essence of her message is that the ECB’s policy review is critical to help lead the bank forward for the next decades, but that there is no goal in sight as they start the review, other than to try to determine how best to fulfill their mandate. She was quite clear, as well, that the market should not get complacent regarding policy activity this year. Currently, the market is pricing for no policy movement in 2020. However, Lagarde emphasized that at each meeting the committee would evaluate the current situation, based on the most recent data, and respond accordingly.

With that as a backdrop, it is interesting to look at this morning’s flash PMI data, which showed that while manufacturing across the Eurozone may be starting to improve slightly, overall growth remains desultory at best. Interestingly it was France that was the bigger laggard this month, with its Services and Composite data both falling well below expectations, and printing well below December’s numbers. Germany was more in line with expectations, but the situation overall is not one of unadulterated economic health. The euro, not surprisingly has suffered further after the weak data, falling another 0.2% this morning which takes the year-to-date performance to a 1.6% decline. While that is certainly not the worst performer in the G10 (Australia holds the lead for now) it is indicative that despite everything happening in the US politically, the economy continues to lead the G10 pack.

Perhaps a bit more surprising this morning is the British pound’s weakness. It has fallen 0.3% despite clearly more robust PMI data than had been expected. Manufacturing PMI rose to 49.8, well above expectations and the highest level since last April. Meanwhile, the Composite PMI jumped to 52.4, its highest point since September 2018, and indicative of a pretty substantial post-election rebound in the economy. Even better was that some of the sub-indices pointed to even faster growth ahead, and the econometricians have declared that this points to UK GDP growth of 0.2% in Q1, again, better than previously expected. Remember, the BOE meets next Thursday, and a week ago, the market had been pricing in a 70% probability of a 25bp rate cut. This morning that probability is down to 47% and the debate amongst analysts has warmed up on both sides. My view is the recent data removes the urgency on the BOE’s part, and given how little ammunition they have left, with the base rate sitting at 0.75%, they will refrain from moving. That means there is room for the pound to recoup some of its recent losses, perhaps trading back toward the 1.3250 level where we started the year.

Away from those stories, the coronavirus remains a major story with the Chinese government now restricting travel in cities with a total population of more than 40 million. While the WHO has not seen fit to declare a global health emergency, the latest count shows more than 800 cases reported with 27 deaths. The other noteworthy thing is the growing level of anger being displayed on social media in China, with the government getting blamed for everything that is happening. (I guess this is the downside of taking credit for everything good that happens). At any rate, if the spread is contained at its current levels, it is unlikely to have a major impact on the Chinese economy overall. However, if the virus spreads more aggressively, and there are more shutdowns of cities and travel restrictions, it is very likely to start impacting the data. With Chinese markets closed until next Friday, our only indicator in real-time will be CNH, which this morning is unchanged. Watch it closely as weakness there next week could well be an indicator that the situation on the ground in China is getting worse.

But overall, today’s market activity is focused on adding risk. Japanese equities, the only ones open in Asia overnight, stabilized after yesterday’s sharp declines. And European equities are roaring this morning, with pretty much every market on the Continent higher by more than 1.0%. US futures are pointing higher as well, albeit just 0.25%. In the bond market, Treasuries and bunds are essentially unchanged, although perhaps leaning ever so slightly toward higher rates. And gold is under pressure today, along with both the yen and Swiss franc. As I said, risk is back in favor.

There is neither data nor Fedspeak today, so the FX market will need to take its cues from other sources. If equities continue to rally, look for increased risk appetite leading to higher EMG currencies and arguably a generally softer dollar. What about the impeachment? Well, to date it has had exactly no impact on markets and I see no reason for that to change.

Good luck and good weekend
Adf

 

Throw Her a Bone

Posted on by

Next week at the ECB meeting
We’re sure to hear Christine entreating
The whole Eurozone
To throw her a bone
And spend more, lest growth start retreating

In England, though, it’s now too late
As recent releases all state
The ‘conomy’s slowing
And Carney is knowing
Come month end he’ll cut the base rate

The dollar is finishing the week on a high note as it rallies, albeit modestly, against virtually the entire G10 space. This is actually an interesting outcome given the ongoing risk-on sentiment observed worldwide. For instance, equity markets in the US all closed at record highs yesterday, and this morning, European equities are also trading at record levels. Asia, not wanting to be left out, continues to rally, although most markets in APAC have not been able to reach the levels seen during the late 1990’s prior to the Asian crisis and tech bubble. At the same time, we continue to see Treasury and Bund yields edging higher as yield curves steepen, another sign of a healthy risk appetite. Granted, commodity prices are not uniformly higher, but there are plenty that are, notably iron ore and steel rebar, both crucial signals of economic growth.

Usually, in this type of market condition, the dollar tends to decline. This is especially so given the lack of volatility we have observed encourages growth in carry trades, with investors flocking to high yield currencies like MXN, IDR, BRL and ZAR. However, it appears that at this juncture, the carry trade has not yet come back into favor, as that bloc of currencies has shown only modest strength, if any, hardly the signal that investor demand has increased.

This leaves us with an unusual situation where the dollar is reasonably well-bid despite the better risk appetite. Perhaps investors are buying dollars to jump on board the US equity train, but I suspect there is more to the movement than this. Investigations continue.

Narrowing our focus a bit more, it is worthwhile to consider the key events upcoming, notably next week’s ECB and BOJ meetings and the following week’s FOMC and BOE meetings. Interestingly, based on current expectations, the Fed meeting is likely to be far less impactful than either the ECB or BOE.

First up is the BOJ, where there is virtually no expectation of any policy changes, and in fact, that is true for the entire year. With the policy rate stuck at -0.10%, futures markets are actually pricing in a 5bp tightening by the end of the year. Certainly, Japan has gone down the road of increased fiscal stimulus, and if you recall last month’s outcome, the BOJ essentially admitted that they would not be able to achieve their 2.0% inflation target during any forecastable timeline. With that is the recent history, and given that inflation remains either side of 1.0%, the BOJ is simply out of bullets, and so will not be doing anything.

The ECB, however, could well be more interesting as the market awaits their latest thoughts on the policy review. Madame Lagarde has made a big deal about how they are going to review procedures and policy initiatives to see if they are designed to meet their goals. Some of the things that have been mooted are a change in the inflation target from “close to but below 2.0%” to either a more precise target or a target range, like 1.5% – 2.5%. Of even more interest is the fact that they have begun to figure out that their current inflation measures are inadequate, as they significantly underweight housing expense, one of the biggest expenses for almost every household. Currently, housing represents just 4% of the index. As a contrast, in the US calculation, housing represents about 41% of the index! And the anecdotes are legion as to how much housing costs have risen throughout European cities while the ECB continues to pump liquidity into markets because they think inflation is missing. Arguably, that has the potential to change things dramatically, because a revamped CPI calculation could well inform that the ECB has been far too easy in policy and cause a fairly quick reversal. And that, my friends, would result in a much higher euro. Today however, the single currency has fallen prey to the dollar’s overall strength and is lower by 0.25%.

As I mentioned, I don’t think the FOMC meeting will be very interesting at all, as there is a vanishingly small chance they change policy given the economy keeps chugging along and inflation has been fairly steady, if not rising to their own 2.0% target. The BOE meeting, however, has the chance to be much more interesting. This morning’s UK Retail Sales data was massively disappointing, with December numbers printing at -0.8%, -0.6% excluding fuel. This was hugely below the expected outcomes of +0.8% and +0.6% respectively. Apparently, Boris’s electoral victory did not convince the good people of England to open their wallets. And remember, this was during Christmas season, arguably the busiest retail time of the year. It can be no surprise that the futures market is now pricing a 75% chance of a rate cut and remember, earlier this week we heard from three different BOE members that cutting rates was on the table. The pound, which has been rallying for the entire week has turned around and is lower by 0.2% this morning with every chance that this slide continues for the next week or two until the meeting crystalizes the outcome.

The other noteworthy news was Chinese data released last night, which showed that GDP, as expected, grew at 6.0%, Retail Sales also met expectations at 8.0%, while IP (+6.9%) and Fixed Asset Investment (+5.4%) were both a bit better than forecast. The market sees this data as proof that the economy there is stabilizing, especially with the positive vibe of the just signed phase one trade deal. The renminbi has benefitted, rallying a further 0.3% on the session, and has now gained 4.6% since its weakest point in early September 2019. This trend has further to go, of that I am confident.

On the data front this morning, we have Housing Starts (exp 1380K), Building Permits (1460K), IP (-0.2%), Capacity Utilization (77.0%), Michigan Sentiment (99.3) and JOLT’s Job Openings (7.25M). So plenty of news, but it is not clear it is important enough to change opinions in the FX market. As such, I expect that today’s dollar strength is likely to continue, but certainly not in a major way.

Good luck and good weekend
Adf

A Good Place

Posted on by

Said Clarida, “We’re in a good place”
With regard to the policy space
Later Bullard explained
That inflation’s restrained
And a rise above two he’d embrace

“At this point I think it would be a welcome development, even if it pushed inflation above target for a time. I think that would be welcome, so bring it on.” So said St Louis Fed President James Bullard, the uber-dove on the FOMC, yesterday when discussing the current policy mix and how it might impact their inflation goals. Earlier, Vice-chairman Richard Clarida explained that while things currently seem pretty good, the risks remain to the downside and that the Fed would respond appropriately to any unexpected weakness in economic data. Not wanting to be left out, BOE member Silvana Tenreyo, also explained that she could easily be persuaded to vote to cut rates in the UK in the event that the economic data started to slow at all.

My point is that even though the central banking community has not seemed to be quite as aggressive with regard to policy ease lately, the reality is that they are collectively ready to respond instantly to any sign that the current global economic malaise could worsen. And of course, the ECB is still expanding its balance sheet by €20 billion per month while the Fed is growing its own by more than $60 billion per month. Any thought that the central bank community was backing away from interventionist policy needs to be discarded. While they continue to call, en masse, for fiscal stimulus, they are not about to step back and reduce their influence on markets and the economy. You can bet that the next set of rate moves will be lower, pretty much everywhere around the world. The only question is which bank will move first.

This matters because FX is a relative game, where currency movement is often based on the comparison between two nations’ monetary regimes and outlooks, with everyone looking at the same data, and central bank groupthink widespread, every response to a change in the economic outlook will be the same; first cut rates, then buy bonds, and finally promise to never raise rates again! And this is why I continue to forecast the dollar to decline as 2020 progresses, despite its robust early performance, the Fed has more room to cut rates than any other central bank, and that will ultimately undermine the dollar’s relative value.

But that is not the case today, or this week really, where the dollar has been extremely robust even with the tensions in Iran quickly dissipating. I think one of the reasons this has been the case is that the US data keeps beating expectations. As we head into the payroll report later this morning, recall that; the Trade Deficit shrunk, ISM Non-Manufacturing beat expectations, Factory Orders beat expectations, ADP Employment beat expectations and Initial Claims fell more than expected. The point is that no other nation has seen a run of data that has been so positive recently, and there has been an uptick in investment inflows to the US, notably in the stock market, which once again traded to record highs yesterday. While this continues to be the case, the dollar will likely remain well bid. However, ultimately, I expect the ongoing QE process to undermine the greenback.

Speaking of the payroll report, here are the latest median expectations according to Bloomberg:

Nonfarm Payrolls 160K
Private Payrolls 153K
Manufacturing Payrolls 5K
Unemployment Rate 3.5%
Average Hourly Earnings 0.3% (3.1% Y/Y)
Average Weekly Hours 34.4
Canadian Change in Employment 25.0K
Canadian Hourly Wage Rate 4.2%
Canadian Unemployment Rate 5.8%
Canadian Participation Rate 65.6%

With the better than expected ADP report, market participants are leaning toward a higher number than the economists, especially given the overall robustness of the recent data releases. At this point, I would estimate that any number above 180K is likely to see some immediate USD strength, although I would not be surprised to see that ebb as the session progresses amid profit-taking by traders who have been long all week. Ironically, I think that a weak number (<130K) is likely to be a big boost for stocks as expectations of Fed ease rise, although the dollar is unlikely to move much on the outcome.

On the Canadian front, they have been in the midst of a terrible run regarding employment, with last month’s decline of 71.2K the largest in more than a decade. While inflation up north has been slightly above target, if we continue to see weaker economic data there, the BOC is going to be forced to cut rates sooner than currently priced (one cut by end of the year) as there is no way they will be able to resist the pressure to address slowing growth, especially given the global insouciance regarding inflation. While that could see the Loonie suffer initially, I still think the long term trend is for the USD to soften.

As to the rest of the world, the overnight session was not very scintillating. The dollar had a mixed performance overall, rising slightly against most of its G10 brethren, but faring less well against a number of EMG currencies, notably the higher yielders. For example, IDR was the big winner overnight, rising 0.6% to its strongest point since April 2018, after the central bank explained that it would not be intervening to prevent further strength and investors flocked to the Indonesian bond market with its juicy 5+% yield. Similarly, INR was also a winner, rising 0.4% as investors chased yield there as well. You can tell that fears over an escalation of the US-Iran conflict have virtually disappeared as these are two currencies that are likely to significantly underperform in the event things got hot there.

On the downside, Hungary’s forint was today’s weakest performer, falling 0.5% after PM Victor Orban explained that Hungary joining the euro would be “catastrophic”. While I agree with the PM, I think the market response is based on the idea that if the Hungarians were leaning in that direction, the currency would likely rally before joining.

On the G10 front, both French and Italian IP were released within spitting distance of their expectations and once again, the contrast between consistently strong US data and lackluster data elsewhere has weighed on the single currency, albeit not much as it has only declined 0.1%. And overall, the reality is that the G10 space has seen very little movement, with the entire block within 0.3% of yesterday’s closes. At this point, the payroll data will determine the next move, but barring a huge surprise in either direction, it doesn’t feel like much is in store.

Payables hedgers, I continue to believe this is a great opportunity as the dollar’s strength is unlikely to last.

Good luck and good weekend
Adf