Many Pains

In England and Scotland and Wales
The vaccine will soon be for sale
But Brexit remains
A source of more pains
If talks this week run off the rails

What a difference a day makes, twenty-four little hours.  Yesterday morning at this time, the bulls ruled the world.  Equity markets were rallying strongly everywhere, bond markets were under pressure, and the dollar was breaking below two-year support levels.  Although most commodity prices were having difficulty extending their recent gains, gold did manage to rebound sharply all day, and, in fact, is higher by another 0.7% this morning, its death being widely exaggerated.

However, aside from gold, this morning looks quite different on the risk front.  Perhaps, ahead of a significant amount of data coming the rest of the week (ADP this morning, NFP on Friday), as well as next week’s ECB meeting, this is, as a well-known Atlanta based beverage company first told us in 1929, the pause that refreshes.

Arguably, the biggest news this morning is that the UK has cleared the first vaccine for use against Covid-19 with the initial doses to be injected as early as next week.  I don’t think anyone can argue with the idea this is an unalloyed positive for just about everything.  If it proves as effective as the initial testing indicated, and if a sufficient percentage of the population gets inoculated, and if that leads to a rebound in confidence and the end of all the government imposed economic restrictions and lockdowns, it could open the door for 2021 to be a gangbuster-type year of growth and activity.  But boy, that sure is a lot of ifs!

And a funny thing about the market response to this news is that…nothing has happened.  The FTSE 100 is higher by a scant 0.2%, and has not shown the strength necessary to support other European markets as both the DAX (-0.3%) and CAC (-0.2%) are in the red.  Is it possible that the markets have already priced in all the ifs mentioned above?  And, if that is the case, what does it say about the future direction of risk appetite?

This being 2020, the year with imperfect hindsight, it should also be no surprise that the good news regarding the vaccine was offset with potential bad news about Brexit.  Michel Barnier, the EU’s top negotiator, indicated that while the mood was still positive in the round-the-clock negotiations, it is very possible that no deal is reached in time to be ratified by all parties.  And that time is drawing near.  After all, the previous deadlines were all artificial, to try to goose negotiations, but December 31st is written into a treaty signed by both sides.  The contentious issues remain access to UK waters by EU fishing vessels and the idea of what will constitute a level playing field between UK and EU companies given their newly different legal and regulatory masters.  In the event, GBP (-0.8%) is today’s worst G10 currency performer as it quickly fell when Barnier’s comments hit the tape.  Something else to keep in mind regarding the pound is that it feels an awful lot like a successful completion of a Brexit deal is entirely priced in.  So, if that deal is reached, the pound’s upside is likely to be quite limited.  Conversely, if no deal is agreed, look for a substantial shock to the pound, certainly as much as 5%-7% in short order.

And with that cheery thought in mind, let us peruse the overall market condition this morning, where eyeglasses are losing their tint.  Equity markets in Asia overnight were as close to unchanged as a non-holiday session would allow, with the largest movement from a main index, the Hang Seng, just +0.1%.  Both the Nikkei and Shanghai moved less, as investors seemed to be coping with a bit of indigestion after the recent sharp rally.  As mentioned above, European bourses have been no better, with only Spain’s IBEX (+0.4%) showing any hint of life, but the rest of the continental exchanges all in the red.  Even US futures markets are under modest pressure, with all three lower by about 0.2%.

The Treasury market saw an impressive decline yesterday, with yields rising 7 basis points in the 10-year, as the risk rally exploded all day long.  European bond markets also declined, but not quite like that.  Given the ECB’s reported -0.3% CPI reading, the case that bond yields on the continent should be rising is very difficult to make.  This morning, though, movement is measured in fractions of basis points, with only Italian BTP’s having recorded anything larger than a 1 basis point move today, in this case a decline in yields.  Otherwise, we are + / – 0.5 basis points or less in Treasuries, Bunds, OAT’s and Gilts.  In other words, nothing to see here.

Oil is feeling a bit toppish here, having rallied 36% during the month of November, but how ceding about 4% during the past few sessions.  OPEC+ talks remain mired in disagreement with the previous production cuts potentially to be abandoned.  However, taking a longer-term view, analysts are pointing to the changes in the US fracking community (i.e. bankruptcies there) and forecasting a significant decline in US oil production in 2021, which, if that occurs, is likely to provide significant price support.

And finally, the dollar, which fell sharply against virtually every currency yesterday, led by BRL (+2.7%) in the emerging markets and EUR (+1.2%) in the G10, has found its footing today.  Looking at the G10 first, NOK (-0.65%) is the laggard alongside the aforementioned pound and SEK (-0.5%).  The euro (-0.25%) has maintained the bulk of its gains after having finally pushed through key resistance at 1.2011-20, the levels seen in early September. Remember, short USD is the number one conviction trade for Wall Street for 2021, and EUR positions remain near all-time highs.

An aside in the euro is that markets continue to look to next week’s ECB meeting with expectations rife the PEPP will be expanded and extended.  Madame Lagarde promised us things would change, and every speaker since, including the Latvian central bank President, who this morning explained that €500 billion more in the PEPP with a timing extension to mid-2022 would be acceptable, as would an extension in the maturity of TLTRO loans to 5 years.  The point is that despite the confidence so many have that the dollar is destined to collapse next year, there is no way other central banks will allow that unimpeded.

Back to markets, on the EMG slate, the situation is similar with more losers than gainers led by ZAR (-1.1%) and PLN (-0.6%).  Of course, both these currencies saw stronger gains yesterday, so this seems to be a little catch-up price action.  Actually, CLP (+0.65%) has opened stronger this morning, simply adding to yesterday’s gains without an obvious catalyst, while KRW(+0.5%) continues to benefitt from better than expected trade and GDP data.

On the data front, this morning brings ADP Employment (exp 430K) as well as the Beige Book this afternoon.  As well, we will hear again from Chairman Powell, who in the Senate yesterday told us all that there needed to be more fiscal stimulus and that the Fed would do all they can to support the economy.  Given this has been the message for the past six months, nobody can be surprised.  However, one idea that seems to be developing is that the Fed could well announce purchases of longer dated bonds at their December meeting in two weeks’ time, which would certainly have an impact on the bond market, and would be seen as easier money, thus likely impact the dollar as well.  When he speaks to the House today, don’t look for anything new.

All told, today is a breather.  Clearly momentum is for a weaker dollar right now, but I continue to believe these are excellent levels for receivables hedgers to act.

Good luck and stay safe
Adf

Appalled

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

Aged Like Bad Wine

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

Hopes are now Dashed

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

Growth’s Pace Declining

Lagarde said, ‘what we have detected’
“More rapidly than [we] expected”
Is growth’s pace declining
And so, we’re designing
New ways for cash to be injected

The pundits were right about the ECB as they left policy unchanged but essentially promised they would be doing more in December.  In fact, Madame Lagarde emphasized that ALL their tools were available, which has been widely interpreted to mean they are considering a cut to the deposit rate as well as adding to their QE menu of APP, PEPP and TLTRO programs.  Interviewed after the meeting, Austrian central bank president, Robert Holtzmann, generally considered one of the most hawkish ECB members, confirmed that more stimulus was coming, although dismissed the idea of an inter-meeting move.  He also seemed to indicate that a further rate cut was pointless (agreed) but that they were working on even newer tools to utilize.  Meanwhile, Lagarde once again emphasized the need for more fiscal stimulus, which has been the clarion call of every central banker in the Western world.

As an aside, when considering central bank activities during the pandemic, the lesson we should have learned is; not only are they not omnipotent, neither are they independent.  The myth of central bank independence is quickly dissipating, and arguably the consequences of this process are going to be long-lasting and detrimental to us all.  The natural endgame of this sequence will be central bank financing of government spending, a situation which, historically, has resulted in the likes of; Zimbabwe, Venezuela and the Weimar Republic.

Now, back to our regularly scheduled programming.

Meanwhile, this morning brought the first set of European GDP data, following yesterday’s US Q3 print.  By now, you have surely heard that the US number was the highest ever recorded, +33.1% annualized, which works out to about +7.4% rise in the quarter.  While this was slightly better than expected, it still leaves the economy about 8.7% below its pre-Covid levels.  As to Europe, France (+18.2%), Germany (+8.2%), Italy (+16.1%) and the Eurozone as a whole (+12.7%) all beat expectations.  On the surface this all sounds great.  Alas, as we have discussed numerous times in the past, GDP data is very backward looking.  As we finish the first month of Q4, with lockdowns being reimposed across most of Europe, it is abundantly clear that Q4 will not continue this trend.  Rather, the latest forecasts are for another negative quarter of growth, adding to the woes of the global economy.

Keeping yesterday’s activities in mind, it cannot be surprising that the euro was the weakest performer around.  In fact, other than NOK, which suffered from the sharp decline in oil prices, even the Turkish lira outperformed the single currency.  If the ECB is promising to open the taps even wider than they are already, the euro has further to fall.  This has been my rebuttal to the ‘dollar is going to collapse’ crowd all along; whatever you think the Fed will do, there is literally a zero probability that the ECB will not respond in kind.  Europe cannot afford for the euro to strengthen substantially, and the ECB will do everything in its power to prevent that from happening, right up to, and including, straight intervention in the FX markets should the euro trade above some fail-safe level.  As it is, we are nowhere near that situation, but just remember, the euro is capped.

Turning to markets this morning, risk appetite remains muted, at best.  Asian equity markets ignored the US rebound and sold off across the board with the Hang Seng (-1.95%) leading the way lower, but closely followed by both the Nikkei and Shanghai, at -1.5% each.  European markets are trying to make the best of the GDP data, as well as the idea that the ECB is going to offer support, but that has resulted in a lackluster performance, which is, I guess, better than a sharp decline.  The DAX (-0.4%) and FTSE 100 (-0.35%) are both under a bit more pressure than the CAC (+0.1%), but the French index is hardly inspiring.  As to US futures, the screen is dark red, with all three futures gauges down about 1.0% at this hour.  One other thing to watch here is the technical picture.  US equity markets certainly appear to have put in a short-term double top, which for the S&P 500 is at 3600.  Care must be taken as many traders will be looking to square up positions, especially given that today is month end, and a break of 3200, which, granted, is still 3% away, could well open up a much more significant correction.

Once again, bond market behavior has been out of sync with stocks as in Europe this morning we see bonds under some pressure and yields climbing about 1 basis point in most jurisdictions despite the lackluster equity performance.  And despite the virtual promise by the ECB to buy even more bonds. Treasuries, meanwhile, are unchanged this morning, but that is after a sharp price decline (yield rally) yesterday, which took the 10-year back to 0.82%.  With the US election next week, it appears there are many investors who are reducing exposures given the uncertainty of the outcome.  But, other than a strong Blue wave, where market participants will assume a massive stimulus bill and much steeper yield curve, the chance for a more normal risk-off performance in Treasuries, seems high.  After all, while growth in Q3 represented the summer reopening of the economy, we continue to hear of regional shutdowns in the US as well, which will have a detrimental impact on the numbers.

And lastly, the dollar, which today is mixed to slightly softer.  Of course, this is after a week of widespread strength.  In fact, the only G10 currency that outperformed the greenback this week is the yen, which remains a true haven in most participants’ eyes.  Today, however, we are seeing SEK (+0.4%) leading the way higher followed by GBP (+0.3%) and NOK (+0.2%).  Nokkie is consolidating its more than 3% losses this week and being helped by the fact that the oil price, while not really rallying, is not falling either.  The pound, too, looks to be a trading bounce, as it fell sharply yesterday, and traders have taken the Nationwide House price Index data (+5.8% Y/Y) as a positive that the economy there is not collapsing.  Finally, SEK seems to be benefitting from the fact that Sweden is not being impacted as severely by the second wave of the virus, and so, not forced to shut down the economy.

In the emerging markets, the picture is mixed, with about a 50:50 split in performance.  Gainers of note are ZAR (+0.7%), which seems to be a combination of trading rebound and the benefit from gold’s modest rebound, and CNY (+0.4%), which continues to power ahead as confidence grows that the Chinese economy is virtually back to where it was pre-pandemic.  On the downside, TRY (-0.5%) continues to be troubled by President Erdogan’s current belligerency to the EU and the US, as well as his unwillingness to allow the central bank to raise rates.  Meanwhile, RUB (-0.35%) is continuing its weeklong decline as, remember, Russia continues to get discussed as interfering in the US elections and may be subject to further sanctions in their wake.

Once again, we have important data this morning, led by Personal Income (exp +0.4%) and Personal Spending (+1.0%); Core PCE (1.7% Y/Y); Chicago PMI (58.0) and Michigan Sentiment (81.2).  Arguably, the PCE data is what the Fed will be watching.  It has been rising rapidly, although this month saw CPI data stall, and that is the expectation here as well.  Now, the Fed has been pretty clear that inflation will have to really pick up before they even think about thinking about raising rates, but that doesn’t mean they aren’t paying attention, nor that the market won’t respond to an awkwardly higher print.  If inflation is running hotter than expected, it has the potential to mean the Fed will be less inclined to ease further, and that is likely to help the dollar overall.  However, barring a sharp equity market decline today, and given the dollar’s strength all week, I expect we will see continued consolidation with very limited further USD strength.

Good luck, good weekend and stay safe
Adf

There is Trouble

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

Giddy and Squiffed

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

Quickly Diminished

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

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

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

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

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

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

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

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

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

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

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

Source: Bloomberg

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

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

Good luck and stay safe
Adf

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

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
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