Tag Archives: #ECB

Death Knell

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Though dinner was not quite a bust
And everything key was discussed
No deal was secured
And now we’re assured
Past Sunday all hope will combust

The pound, not surprisingly, fell
As traders have heard its death knell
Now eyes have all turned
To Frankfurt, concerned
Christine, Europe’s problems, won’t quell

One need only look at the pound’s performance this morning (GBP -0.8%) to understand that last night’s much touted dinner meeting between Boris and Ursula did not come to any conclusions.  While there appeared to be great comradery all around, and both parties were quick to say they understand how the other side feels, neither was willing to give ground.  The upshot is that the newest deadline appears to be this Sunday coming, when if a deal is not reached, there is a consensus that no deal will be reached in time.  While I continue to believe that this remains political theater, even if Sunday is simply another false deadline, the real deadline is now exactly 3 weeks away, so something needs to happen soon if a no-deal Brexit is to be prevented.  History has shown that deals of this nature, especially in Europe, always come down to the last possible moment.  We shall see if Sunday is that moment.  As to the potential impact on the pound, no-deal could easily take us to 1.25, while a successful conclusion is probably good for 1.40.

On to the day’s other major event, the ECB meeting, where Madame Lagarde is presiding over her fractious team once again as they seek to explain to us exactly what recalibration means.  You may recall that at the October meeting, Lagarde promised that the ECB would “recalibrate” its tools by this meeting.  This has come to be code for increased monetary policy easing of the following nature: €500 billion of additional PEPP purchases and a minimum 6-month extension of both the emergency pandemic program as well as the original QE, the APP (Asset Purchase Program) to run through the end of 2021.  In addition, the TLTRO III program is expected to be extended and expanded.  Expectations are growing that there may be two more tranches of these loans, that the loan tenors may be extended beyond 3 years, and that the interest rate, currently -1.0%, could be cut further.  One of the problems with the TLTRO, though, is that the two biggest users, Italy and Spain, have almost run out of capacity to use more of these loans, so any benefit on this front, even with expansion, is likely limited.

And truthfully, those are really the two key stories of the session so far.  Interestingly, yesterday’s news about an agreement regarding the EU’s pandemic budget seems to have had virtually no impact on the markets as yet.  You may recall that when this was first mooted, back in the summer, and the idea that the EU would issue joint bonds was agreed, many thought this was Europe’s Hamiltonian moment, finally bringing Europe’s fiscal house under one roof, and preparing for great things going forward.  So far, this has not been the case.  But the lack of market response to key steps forward must be a little disheartening for those involved.  Of course, it remains to be seen if this budget is truly the beginning of something new, or simply a response to the Covid pandemic, where Germany and its frugal neighbors felt they had no choice but to accept the outcome.  Certainly, if this is the true way forward, it removes one of the biggest structural impediments to the single currency and opens the way for a secular appreciation.  We shall see.

As to markets today, yesterday’s late day sell-off in the US was followed with modest Asian weakness (Nikkei -0.2%, Hang Seng -0.35%, Shanghai 0.0%) although European bourses have held onto modest gains.  Right now, the FTSE 100 (+0.7%) is leading the way (remember, a weaker pound typically helps the FTSE), with the CAC (+0.3%) and DAX (+0.1%) showing much less promise.  As to US futures, they are very little changed at this hour with no real information from their movement of a few points in either direction.

Bond markets, however, are a little more consistent, generally rallying slightly with yields edging lower.  The biggest mover are UK Gilts, with 10-year yields lower by 5.7 basis points as investors and traders are betting on a weaker UK economy with a no-deal outcome.  After that, the PIGS are doing well, with yields lower between 2-4 bps, as visions of further ECB purchases dance in investors’ heads.  Treasuries are moving in the same direction, but the 1 basis point decline in yield is hardly game-changing.

Commodity markets continue their confusing ways, this time with oil rallying slightly, (WTI
+1.5%) while gold is declining, -0.3%.  And finally, the dollar is having, what can only be described, as a mixed session.  In the G10, the pound has actually extended its early losses and is now down -1.0%.  As well, JPY (-0.3%) is also weaker despite (because of?) what seemed to be pretty reasonable manufacturing data overnight.  The rest of the bloc, however, is firmer vs. the dollar led by AUD (+0.6%) on the back of rising iron ore prices, although the gains fall away to much more modest outcomes beyond that.  CAD (+0.3%) seems to be benefitting from the rise in oil prices but nothing else is even noteworthy.

Emerging market currencies are also mixed, with the gainers led by BRL (+0.8% on the open) after the central bank left rates on hold last night, as universally expected, but also explained that the pledge to keep rates at that level may be coming to an end as inflation starts to rise in the country.  This was taken as quite hawkish, so I would look for further BRL appreciation going forward.  Elsewhere on the plus side is RUB (+0.45%) clearly benefitting from oil’s rise, and HUF (+0.35%) which continues to benefit from the EU budget deal.  On the downside, ignoring TRY, ZAR (-0.4%) is the worst performer, seeming to suffer from a surge in Covid cases, with KRW (-0.3%) seeming to feel the pressure of yesterday’s tech stock sell-off in the US.

We finally get some data of note this morning led by the weekly Initial Claims (exp 725K) and Continuing Claims (5.21M) data.  But we also see the latest reading on headline CPI (0.1%, 1.1% Y/Y) and core (0.1%, 1.5% Y/Y).  The great inflation/deflation debate continues amongst the economic community with the deflationists continuing to point to the data as their trump card, but the inflationists continuing to point to real life.  My money is on inflation, probably as soon as next year, that is far higher than the Fed currently anticipates.

And that’s really it for the day.  All eyes will be on the tape at 7:45 when the ECB releases their statement, and then Madame Lagarde will be on camera starting at 8:30am.  Barring a breakthrough on Brexit today (which seems highly unlikely) the pound seems to have room to fall further.  As to the euro, that is in Lagarde’s hands.  And the dollar in general?  The recent slow trend lower remains intact, and I wouldn’t start that fight quite yet.

Good luck and stay safe
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The Table is Set

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In Brussels, the table is set
As Boris and Ursula bet
That dinner together
Will be the bellwether
To ending the hard Brexit threat

So, appetite for risk is whet
With central banks sure to abet
More equity buying
As they keep on trying
To buy every last piece of debt

There hasn’t been this much interest in a meal in Europe since the one painted by DaVinci some 530 years ago.  Clearly, the big story is this evening’s dinner date between UK PM Boris Johnson and European Commission President Ursula von der Leyen, where they will make what appears to be the final attempt to get some political agreement on the last issues outstanding in order to complete the Brexit trade deal.  With just over three weeks before the UK exits the EU, time is clearly of the essence at this stage.  I remain confident that an agreement will be reached as it is in both sides’ collective interest to do so.  Rather, the current political theater is seen as necessary, again for both sides, in order to demonstrate they did everything they could to achieve the best possible outcome.  After all, Boris is going to have to cede some portion of UK sovereignty, and the EU is going to have to cede some adherence to their extraordinarily large canon of laws.

The FX market seems to share my opinion as the pound has rallied more than 1% since I wrote yesterday and is currently firmer by 0.7% since yesterday’s close.  As I wrote last week, I remain convinced that the market has not actually priced in a successful completion of a deal, rather that the pound’s performance over the past several months, a nearly 10% rise since July 1st, has simply been reflective of the broad dollar decline and not a bet on a positive Brexit outcome.  As such, I believe there is a good amount of upside potential for the pound in the event of a positive result, perhaps as much as 3% right away, and 5%-6% over time.  Similarly, if a deal is not reached, a 5% decline is in the cards.  But, for now, all we can do is wait to hear the outcome.  Dinner is at 8pm in Brussels, so likely there will be little news before 4pm this afternoon.

Away from the Brexit story, however, the market discussion continues to revolve around prospects for a quick implementation of the Covid-19 vaccine and the resumption of pre-pandemic economic activity.  One of the conundrums in this regard is that despite what appears to be a growing belief that the vaccine will solve the covid crisis, thus enabling a return to economic growth, the central banking community will continue to inject unfathomable sums of liquidity into banks, (and by extension markets and maybe even the economy), to support economic growth.  It seems a bit duplicative to me, but then I’m just an FX salesman sans PhD.  After all, if the vaccine will allow people to revert to their former selves, what need is there for central banks to keep buying bonds?  (And in some cases, equities.  As an aside, yesterday the BOJ reached a milestone as the largest equity holder in Japan, outstripping the government pension fund, GPIF, and now in possession of nearly 8% of the entire market there.)

The thing is, there is no prospect that this behavior is going to change.  For instance, tomorrow the ECB’s final meeting of the year will conclude, and they are expected to expand the PEPP by at least €500 billion and extend the tenor of the program between six months and a year.  In addition, they are expected to expand the TLTRO III program (targeted long-term refinancing operations) by another year, and there were even some hints at a rate cut there.  The latter would be extraordinary as the current rate is -1.0%.  This means that European banks that borrow funds in this program pay -1.0% (receive 1.0% pa) as long as they lend these funds on to corporate and business clients, with no restrictions on what they can charge.  Balances in this program have fallen from €1.3 trillion to just €180 billion since the summer, so it is believable that the rate will change.  The ECB particularly likes this program as they believe it really encourages business loans.

Something else to watch in tomorrow’s meeting is whether either the statement, or Madame Lagarde in her press conference opening, discusses the exchange rate.  Since the euro first traded above 1.20 back in September, which brought an immediate response from the ECB via some jawboning, the single currency had really done very little, until November, when the latest move higher began.  Now, after a 4% rally, it would not be surprising for the ECB to once again mention the importance of a “competitive” (read: weak) euro.  With inflation in the Eurozone remaining negative, Lagarde and company simply cannot afford for the euro to rise much further.  And none of this discussion includes what may well come from the FOMC next week!

But on to today’s activity.  Risk appetite continues to be strong where equity markets in Asia (Nikkei +1.3%, Hang Seng +0.75%) and Europe (DAX +0.8%, CAC +0.2%, FTSE 100 +0.4%) are all continuing yesterday’s modest gains.  The one exception here is Shanghai (-1.3%) which seemed to respond to inflation data overnight (CPI -0.5%).  The cause here seems to be declining pork prices (remember last year the Asian Swine Flu resulted in the culling of Chinese herds and dramatic price rises) but also the expectation that the PBOC is not going to change course with respect to forcing the deleveraging of the real estate sector and concomitant bubble there.

Bond markets are behaving as one would expect in a risk-on scenario, with Treasury yields reversing yesterday’s 2bp decline, while Bunds and OATs have both seen yields edge higher by 1 basis point.  Oil prices have rallied 1.5%, partly on risk attitude and partly on the story of an attack on Iraqi oil assets disrupting supply.  Finally, gold, which has really been rebounding since the end of last month, has given up 0.65% this morning.

Lastly, the dollar is generally softer today, against most G10 and EMG currencies.  AUD (+0.9%) is the leader this morning after the Westpac Consumer Confidence Survey printed at a much higher than expected 112.0.  For reference, that was the highest print since October 2010!  But as mentioned, the pound is firmer, as is virtually the entire bloc, albeit with less impressive moves.

In emerging markets, HUF (+0.8%) is the leading gainer, followed by PLN (+0.7%) and CZK (+.4%), all of which are far outperforming the euro (+0.1%).  It seems that the EU Stimulus deal, which was being held up by Hungary and Poland over language regarding the rule of law, has finally been agreed by all parties, with those three nations set to receive a significant boost when it is finally implemented next year.  On the flip side, TWD (-0.4%) was the worst performer as a late session sell-off wiped out early gains.  At this point, there is no obvious catalyst for the move, which looks very much like a large order going through an illiquid market onshore.

There is no data of note this morning and no speakers either.  Risk appetite remains the driver, with not only vaccine euphoria, but also hopes for a US stimulus bill rising as well.  In other words, everything is fantastic!  What could possibly go wrong?

As long as equities continue to rally, the dollar is likely to remain under pressure, but with the ECB on tap for tomorrow, I don’t expect a breakout, unless something really positive (or negative) comes out of dinner in Brussels.

Good luck and stay safe
Adf

Slipping Away

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Last week it appeared conversations
On Brexit, had built expectations
To broker a deal
That both sides would feel
Was fruitful for all Europe’s nations

Alas, based on headlines today
That good will is slipping away
Concern has now grown
That both sides condone
No deal, to the market’s dismay

Apparently, Brexit talks have reached their denouement, with the weekend efforts of PM Johnson and European Commission President Von der Leyen unable to bridge the final gaps.  The key issues regarding fishing in UK waters and state support for UK companies remain outstanding and neither side has yet been willing to budge.  There is clearly a great deal of brinksmanship ongoing here, but with the timeline so compressed, the chance for a No-deal outcome is still remarkably high.  In fact, as of a bit past 6am in NY, the headlines claim that negotiations might end by this evening in Europe, after one final call between the two leaders.

So, is this the end?  Is Brexit upon us, three weeks early?  And if so, what can we expect going forward?

The first thing to remember about international negotiations is they are never over, even when they have ended, especially in a situation of this nature.  The economic impact in both the UK and throughout Europe will be significant in a no-deal outcome, and this is something that neither side really wants to occur, despite any rhetoric to the contrary.  The most recent analyst estimates indicate that the UK’s economy will suffer a long-term reduction of 3.0% in GDP compared to the situation if a deal is completed.  Meanwhile, the EU’s impact will be a much smaller 0.5% of GDP, but that impact will be unevenly distributed, with Ireland expected to suffer a 6% decline in economic activity, while various other nations see much smaller effects.  Germany, too, will feel the pain, as German auto exports to the UK are one of the most lucrative parts of German industry, and with tariffs imposed, they will certainly decline.

And, ultimately, that is why the best bet remains that a deal will be done.  Especially given the economic disruption of the pandemic, the ability for either the UK or EU to blithely sit by and allow a critical trade relationship to crumble is virtually nil.  So, even if the talks ostensibly end later today, they will not have ended.  Both sides will still be seeking a deal, as both sides desperately need one.

However, investors are clearly worried, as evidenced by this morning’s price action across markets.  Perhaps the most obvious outcome is that of the pound, which has fallen 1.3% on the news.  Last week I was making the case that the market had not fully priced in a positive deal, and any agreement was likely to see the pound rally.  At the same time, a true collapse in talks with a no-deal outcome is likely to see a further decline, with 5%-7% seen as a reasonable result.  This morning’s movement is just a down payment on that, if no deal actually is the outcome.

But this news seems to have forced investors across markets to reconsider their current positioning and potential market responses to negative news.  Perhaps you are not old enough to remember what negative news actually is, so I will give a brief refresher here.  Negative news is a situation where not only is the economic impact indisputably harmful to a (country, company, currency), but that a central bank response of further policy ease will be unable to change the outcome.  Thus, Friday’s weaker than expected NFP number was not really negative because it encouraged the view that the Fed will ease further next week, thus offsetting any bad economics.  But Brexit changes the structure, not just the data, and no matter what the BOE does, customs checks are still going to slow down trade and commerce.

It is with this in mind that we look at markets this morning and see that risk is broadly being reduced.  Asian equity markets started the move as the Nikkei (-0.75%), Hang Seng (-1.25%) and Shanghai (-0.8%) all showed solid declines.  And this was despite Chinese data showing that exports from the mainland had increased a much greater than expected 21% and fostered a record large trade surplus.  In Europe, the situation is similar with one real exception.  The DAX (-0.3%) and CAC (-0.8%) are leading the Continent lower as investors react to the potential crimp in economic activity.  However, the FTSE 100 (+0.5%) is higher as most members of the index will benefit greatly from a weaker pound, and so are responding to the pound’s market leading decline.

Speaking of the pound, it has fallen 1.3% from Friday’s closing levels and is the leading decliner across all major currencies.  But weakness is evident in the commodity bloc as AUD (-0.5%), NZD (-0.4%) and CAD (-0.2%) are all suffering alongside oil (WTI -0.9%) and gold (-0.4%).  EUR (-0.1%) has been a relative outperformer as the market continues to estimate a much smaller impact of a no-deal scenario.  Meanwhile, in the EMG bloc, losses are virtually universal, but the magnitude is not that substantial.  For example, MXN (-0.7%) is the worst performer today, obviously suffering from oil’s decline, but we have also seen weakness throughout the CE4 (HUF -0.4%, CZK -0.3%, PLN -0.2%) along with ZAR and RUB, both having fallen 0.3%.  In fact, the one bloc that has outperformed today is APAC, where only two currencies (MYR -0.2% and SGD -0.15%) are in the red.  Given the genesis of the problems is in Europe, this should not be that surprising.

Bond markets are taking the risk-off theme seriously with Treasury yields lower by 2.2 basis points and European govvies seeing substantial demand.  Gilts lead the way, with a 5.6bps decline, but Bunds (-3.0bps) and OAT’s (-2.6bps) are also rallying nicely.  Remember, too, that the ECB meets Thursday with expectations built in for a €500 billion increase in PEPP as well as a maturity extension of between six and twelve months in addition to an increase in the TLTRO program, with a maturity extension there as well.  One other thing to watch from the ECB is whether or not they mention the euro and its recent rally.  Madame Lagarde and her colleagues cannot countenance a significant rally from current levels, and I expect they will make that clear.

As to data this week, aside from the ECB, CPI is the biggest thing in the US:

Tuesday NFIB Small Business 102.5
Nonfarm Productivity 4.9%
Unit Labor Costs -8.9%
Wednesday JOLTs Job Openings 6.325M
Thursday Initial Claims 725K
Continuing Claims 5.27M
CPI 0.1% (1.1% Y/Y)
-ex food & energy 0.1% (1.6% Y/Y)
Friday PPI 0.1% (0.7% Y/Y)
-ex food & energy 0.2% (1.5% Y/Y)
Michigan Sentiment 76.0

Source: Bloomberg

With the last FOMC meeting of the year next Wednesday, the Fed is in their quiet period so there will be no commentary on that front.  With this in mind, the dollar, which continues to trend lower, will likely need some new catalyst to take the next step.  At this point, the biggest surprise is likely to be a positive conclusion to the Brexit talks, but given what we have seen over the past eight months, it is pretty clear that investors remain hugely bullish on the idea of the post-pandemic economy and will not be denied in their belief that stocks can only go up.  My gut tells me that US equities, where futures are currently lower by 0.3% or so, will finish the day higher, and the dollar will cede much of its overnight gains, even without a deal.

Good luck and stay safe
Adf

Further Afflictions

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Each day there is growing conviction
The buck is due further affliction
More views now exist
The Fed will soon ‘Twist’
Thus, slaking the market’s addiction

But even if Powell and friends
Do act as the crowd now contends
Does anyone think
Lagarde will not blink
And cut rates at which her group lends?

You cannot read the financial press lately without stumbling across multiple articles as to why the dollar is due to fall further.  There is no question it has become the number one conviction trade in the hedge fund community as well as the analyst community.  There are myriad reasons given with these the most common:

1.     The introduction of the vaccine will lead to a quicker recovery globally and demand for risk assets not havens like the dollar
2.     The Biden administration will be implementing a new, larger stimulus package adding to the global reflation trade
3.     The Fed is going to embark on a new version of Operation Twist (where they swap short-dated Treasuries for long-dated Treasuries) in order to add more stimulus, thus weakening the dollar
4.     The market technical picture is primed for further dollar weakness in the wake of recent price action breaking previous dollar support levels.

Let’s unpack these ideas in order to try to get a better understanding of the current sentiment.

The vaccine story is front page news worldwide and we have even had the first country, the UK, approve one of them for use right away.  There is no question that an effective vaccine that is widely available, and widely taken, could easily alter the current zeitgeist of fear and loathing.  If confidence were to make a comeback, as lockdowns ended and people were released from home quarantines, it would certainly further support risk appetite.  Or would it?

Consider that risk assets, at least equities, are already trading at record high valuations as investors have priced in this outcome.  You may remember the daily equity rallies in October and November based on hopes a vaccine would be arriving soon.  The point is, it is entirely possible, and some would say likely, that the vaccine implementation has already been priced into risk assets.  One other fly in this particular ointment is that so many businesses have already permanently closed due to the government-imposed restrictions worldwide, that even if economic demand rebounds, supply may not be available, thus driving inflation rather than activity.

How about the idea of a new stimulus package adding to global reflation?  Again, while entirely possible, if, as is still widely expected, the Republicans retain control of the Senate, any stimulus bill is likely to disappoint the bulls.  As well, if this is US stimulus, arguably it will help support the US economy, US growth and extend the US rebound further and faster than its G10 and most EMG peers.  Yes, risk will remain in favor, but will that flow elsewhere in the world?  Maybe, maybe not.  That is an open question.

Certainly, a revival of Operation Twist, where the Fed extends the maturity of its QE purchases in order to add further support to the economy by easing monetary policy further would be a dollar negative.  I thought it might be instructive to see how the dollar behaved back in 2011-12 when Ben Bernanke was Fed Chair and embarked on the first go-round of this policy.  Interestingly enough, from September 2011 through June 2012, the first leg of Operation Twist, the dollar rallied 8.7% vs. the euro.  When the Fed decided to continue the program for another six months, the first dollar move was a continuation higher, with another 2.75% gain, before turning around and weakening about 6%.  All told, through two versions of the activity, the dollar would up slightly firmer (2.5%) than when it started.

And this doesn’t even consider the likelihood that if the Fed eases further, all the other major central banks will be doing so as well.  Remember, FX is a relative game, so relative monetary policy moves are the driver, not absolute ones.  And once again, I assure you, that if the euro starts to rally too far, the ECB will spare no expense to halt that rally and reverse it if possible.  Currently, the trade-weighted euro is back to levels seen in early September but remains 1.75% below the levels seen in 2018.  It is extremely difficult to believe that the ECB will underperform next week at their meeting if the euro is climbing still higher.  Deflation in Europe is rampant (CPI was just released at -0.3% in November), and a strong currency is not something Lagarde and her compatriots can tolerate.

Finally, looking at the technical picture, it may well be the best argument for further dollar weakness.  To the uninitiated (including your humble author) the variety of technical indicators observed by traders can be dizzying.  However, some include satisfying the target of an “inverted hammer” pattern, recognition of the next part of an Elliott Wave ABC correction and DeMark targets now formed for further dollar weakness.  While that mostly sounded like gibberish, believe me when I say there are many traders who base every action on these indicators, and when levels are reached in the market, they swarm in to join the parade.  At the same time, the hedge fund community, while short a massive amount of dollars, is reputed to have ample dry powder to increase those positions.

In sum, ironically, I would contend that the technical picture is the strongest argument for the dollar to continue its recent decline.  Risk assets are already priced for perfection, the vaccine is a known quantity and any Fed move is likely to be matched by other central banks.  This is not to say that the dollar won’t decline further, just that any movement is likely to be grudging and limited.  The dollar is not about to collapse.

A quick recap of today’s markets shows that risk appetite, not unlike yesterday’s lack of enthusiasm, remains satisfied for now.  Asian equities were mixed with the Hang Seng (+0.7%) the leader by far as both the Nikkei (0.0%) and Shanghai (-0.2%) showed no life.  European bourses are mostly lower (DAX -0.4%, CAC -0.25%) although the FTSE 100 is flat on the day.  And US futures are also either side of flat.

Bond markets, are rebounding a bit from their recent decline, with Treasuries seeing yields lower by 1 basis point and European bonds all rallying as well, with yields falling between 2bps and 3bps.  The latter may well be due to the combination of weaker than expected Services PMI releases as well as the news that Germany is extending its partial lockdown to January 10.  (Tell me again why the euro is a good bet here!)

Gold continues to rebound from its correction last week, up another $10 while the dollar, overall, this morning is somewhat softer, keeping with the recent trend.  GBP (+0.6%) is the leading gainer in the G10 on continued hopes a Brexit deal will soon be reached, but the rest of the bloc is +/-0.2%, or essentially unchanged.  EMG gainers include HUF (+0.7%) as the government there expands infrastructure spending, this time on airports, while the rest of the bloc has seen far smaller gains, which seem to be predicated on the idea of US stimulus talks getting back on track.

Initial Claims (exp 775K) data leads the calendar this morning with Continuing Claims (5.8M) and then ISM Services (55.8) at 10:00.  Yesterday’s Beige Book harped on the negative impact that government shutdowns have had on companies with no sign, yet, of vaccine hopes showing up in businesses.  At the same time, Chairman Powell, in his House testimony yesterday, explained that there was no rift between the Fed and the Treasury, and the Fed response when Treasury Secretary Mnuchin said he was recalling unused funds from the CARES act, was merely reinforcement of the idea that the Fed was not going to back away from their stated objectives.

In the end, the dollar remains under pressure and the trend is your friend.  With that in mind, though, it strikes that a decline of more than another 1%-2% will be very difficult to achieve without a more significant correction first.  Again, for receivables hedgers, these are good levels to consider.

Good luck and stay safe
Adf

Many Pains

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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

Nothing but Cheerful

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While yesterday traders were fearful
Today they are nothing but cheerful
The vaccine is coming
While Bitcoin is humming
It’s only the bears who are tearful

Risk is back baby!!  That is this morning’s message as a broad-based risk-on scenario is playing out across all markets.  Well, almost all markets, oil is struggling slightly, but since according to those in the know (whoever they may be) we have reached so-called ‘peak oil’, the oil market doesn’t matter anymore.  So, if it cannot rally on a day when other risk assets are doing so, it is of no consequence.

Of course, this begs the question, what is driving the reversal of yesterday’s theme?  The most logical answer is the release of the newest batch of Manufacturing PMI data from around the world, which while not universally better, is certainly trending in the right direction.  Starting last night in Asia, we saw strength in Australia (55.8), Indonesia (50.6), South Korea (52.9), India (56.3) and China (Caixin 54.9).  In fact, the only weak print was from Japan (49.0), which while still in contractionary territory has improved compared to last month.  With this much renewed manufacturing enthusiasm, it should be no surprise that equity markets in Asia were all bright green.  The Nikkei (+1.35%), Hang Seng (+0.85%) and Shanghai (+1.75%) led the way with New Zealand the only country not to join in the fun.

Turning to European data, it has been largely the same story, with Germany (57.8) leading the way, but strong performances by the UK (55.6) and the Eurozone (53.8) although Italy (51.5) fell short of expectations and France (49.6) while beating expectations remained below the key 50.0 level.  Spain (49.8), too, was weak failing to reach expectations, but clearly, the rest of the Continent was quite perky in order for the area wide index to improve.  Equity markets on the Continent are also bright green led by the FTSE 100 (+1.95%) but with strong performances by the DAX (+1.0%) and CAC (+1.1%) as well.  In fact, here, not a single market is lower.  Even Russian stocks are higher despite the weakest PMI performance of all (46.3).

The point is, there is no risk asset that is not welcome in a portfolio today.  However, while the broad sweep of PMI data is certainly positive, it seems unlikely, given the market’s history of ignoring both good and bad data from this series, that this is the only catalyst.  In fairness, there was some other positive data.  For example, German Unemployment fell to 6.1%, a tick below last month and 2 ticks below expectations.  At the same time, Eurozone CPI was released at a slightly worse than expected -0.3% Y/Y in November, which only encourages the bullish view that the ECB is going to wow us next week when they unveil their latest adjustments to PEPP.

And perhaps, that is a large part of the story, expectations for ongoing central bank largesse to support financial markets continue to be strong.  After all, the buzz in the US is that the combination of Fed Chair Jay Powell alongside former Fed Chair Janet Yellen as Treasury Secretary means that come January or February, the taps will once again open in the US with more fiscal and monetary assistance.  Alas, what we know is that the bulk of that assistance winds up in the equity markets, at least that has been the case to date, so just how much this new money will help the economy itself remains in question.

But well before that, we have a number of key events upcoming, notably next week’s ECB meeting and the Fed meeting the following week.  Focusing first on Frankfurt, recall that Madame Lagarde essentially promised action at their late October get together, and the market wasted no time putting numbers on those expectations.  While no rate cut is anticipated, at least not in the headline Deposit rate (currently -0.50%), the PEPP is expected to be increased by up to €600 billion with its tenor expected to be extended by an additional six months through the end of 2021.  However, before we get too used to that type of expansion, perhaps we should heed the words of Isabel Schnabel, the German ECB Executive Board member who today explained that while further support would be forthcoming, thoughts that the ECB would take the Mario Draghi approach of exceeding all expectations should be tempered.  Of course, the question is whether a disappointing outcome next week, say just €250 billion additional purchases, would have such a detrimental impact on the markets economy.  Remember, while Madame Lagarde has a great deal of political nous, she has thus far demonstrated a tin ear when it comes to market signals.  The other topic on which she opined was the TLTRO program, which she seems to like more than PEPP, and which she implied could see both expansion and even a further rate cut from the current -1.00%.

And perhaps, that is all that is needed to get the juices flowing again, a little encouragement that more money is on its way.  Certainly, the bond markets are exhibiting risk on tendencies, although yield increases of between 0.2bps (Germany) and 1.1bps (Treasuries) are hardly earth shattering.  They are certainly no indication of the reflation trade that had gotten so much press just a month ago.

And finally, the dollar, which is definitely softer this morning, but only after having rallied all day yesterday, so is in fact higher vs. yesterday morning’s opening levels.  The short dollar trade remains one of the true conviction trades in the market right now and one where positioning is showing no signs of abating.  Almost daily there seems to be another bank analyst declaring that the dollar is destined for a great fall in 2021.  Perhaps they are correct, but as I have repeatedly pointed out, no other central bank, certainly not the ECB or BOJ is going to allow the dollar to decline sharply without some action on their part to try to slow or reverse it.

A tour of the market this morning shows that CHF (+0.4%) is the leading gainer in the G10, although followed closely by SEK (+0.4%) and EUR (+0.35%).  Of course, if you look at the movement since Friday, CHF and EUR are higher by less than 0.1% and SEK is actually lower by 0.45%.  In other words, do not believe that the dollar decline is a straight-line affair.

Emerging markets are seeing similar price action, although as the session has progressed, we have seen more currency strength.  Currently, CLP (+0.9%), ZAR (+0.85%) and BRL (+0.8%) are leading the way here, all three reliant on commodity markets, which have, other than oil, performed well overnight.  The CE4 are also higher (HUF +0.6%, CZK +0.5%), tracking the euro’s strength, and Asian currencies had a fair run overnight as well, with INR (+0.5%) the best performer as a beneficiary of an uptick in stock and bond investments made their way into the country.

On the data front, today brings ISM Manufacturing (exp 58.0) and Construction Spending (0.8%), with the former certainly of more interest than the latter.  This is especially so given the PMI data overnight and the market response.  But arguably, of far more importance is Chairman Powell’s Senate testimony starting at 10:00 this morning, which will certainly overshadow comments from the other three Fed speakers due later.

Yesterday at this hour, with the dollar under pressure, it seemed we were going to take out some key technical levels and weaken further.  Of course, that did not happen.  With the dollar at similar levels to yesterday morning, and another dollar weakening sentiment, will today be the day that we break 1.20 in the euro convincingly?  As long as CNY remains strong, it is certainly possible, but I am not yet convinced.  Receivables hedgers, these are the best levels seen in two years, so it may not be a bad time to step in.

Good luck and stay safe
Adf

Growth’s Embers

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Said Madame Lagarde, come December
There’s something you all must remember
It’s not ‘bout the size
But how we comprise
Our policy to fan growth’s embers

For a consensus driven institution, the ECB is, apparently, finding it pretty hard to arrive at a consensus on what the promised policy expansion should contain.  You may recall that at their meeting in late October, the ECB appeared pretty explicit that they would be increasing monetary support at the upcoming meeting.  The narrative quickly developed that another €500 billion of PEPP purchases would be appropriate, although there were some ideas that the ECB could expand the APP, their original QE program.  With this in mind, it is crucial to remember that markets typically take the most simplistic approach toward any analysis, and so respond to numbers.  Subtleties are either misunderstood or ignored by the trading community as they require far too much time to appreciate before responding.  After all, it is much easier for algorithms (and traders) to be programmed to buy on a large number and sell on a small number than to dig into the meaning of the words offered up by the ECB.

Keeping this in mind, it is quite interesting that recently, we have started to hear from numerous ECB members that the size of the program adjustments are not as important as their nature.  (Now where have we heard that before?)   Just this morning, Madame Lagarde herself was quoted as follows, “What is really important is that we make sure that the financing conditions are stable, are conducive to economic recovery as it comes.”  She also emphasized that “[market participants must] not only know that the level of financing is going to be there, but that it will be available for a period for time that will last long enough.”  Reading between the lines, this sounds like the mooted €500 billion expansion that has been the market baseline premise since the October meeting, is not going to be realized.  Looking back over the past week, comments from numerous other ECB members, including Chief Economist Philip Lane, as well as Finland’s Olli Rehn, Belgium’s Yves Mersch and Spain’s Pablo Hernandez de Cos have also highlighted that size doesn’t matter, but instead it is the nature and duration of the program that is important.

What are we to make of this change in emphasis?  Initially there are two conclusions that can be drawn.  First, some of the more hawkish members of the ECB; Germany, Austria and the Netherlands most likely, have made it clear that they don’t want to see an unlimited amount of asset purchases as those three nations still believe that central bank financing of government spending is a bad idea.  Thus, the fact that central bankers from more dovish countries are trying to temper expectations is playing to the hawks.

But there is another, more intriguing possibility, and that is that the ECB, who has been terrified of an overly strong euro, has realized that the Chinese renminbi’s consistent strength vs. the dollar (+8.6% since late May) has now been sufficient to offset the euro’s appreciation since that same time.  Essentially, the euro saw a very sharp rise from May through August but has been biding its time since then while the renminbi has been steadily climbing almost every day.  The point is, on a trade-weighted basis, the euro is no longer nearly as strong as it was in August, and so if EURUSD rises a bit further, the ECB may not be too troubled.  This is not to imply that they will be happy to see the euro go screaming up through 1.25 anytime soon, but if it trades to 1.20 or 1.21, it will probably not be ringing alarm bells.

Putting it all together leads me to believe that the ECB no longer is feeling quite as stressed about the euro’s strength vs. the dollar this summer, and so does not feel compelled to increase QE by that much in order to prevent a further rise.  The $2.2 trillion question (that is roughly the amount of EURUSD transacted each day according to the BIS) is, if the ECB disappoints the narrative, despite their claims, and the euro rallies sharply, what will they do then?  Poor Christine already has enough trouble speaking to the market effectively.  If this message gets muddled, it will really create problems, as well as the chance for an emergency program early next year.

With that in mind, let’s look at today’s activities.  After a modest sell-off in the US yesterday, Asia had another mixed session with the Nikkei (-1.1%) falling for a second day after its long run of gains, while the Hang Seng (+0.5%) and Shanghai (+0.2%) both finished with small pluses.  The European markets are all green, but the movement has been de minimis, with the DAX and CAC (+0.2% each) essentially leading the way while the FTSE 100 is simply flat.  Certainly, there is no massive risk-on attitude apparent.  Finally, US futures are all modestly higher at this hour, but 0.2% is a good description here as well.

Bond markets are also fairly muted this morning with Treasury yields essentially unchanged, having retraced half of the vaccine related movement of the past week.  European markets are similarly little changed, except for Greek bonds, where yields have fallen nearly 5 basis points.  But the rest of the curve is within one basis point of yesterday’s levels.  Again, it is hard to discern much risk attitude here.

Oil prices have pushed higher by 1% this morning but have not yet reclaimed the heights seen in the wake of the vaccine announcement.  Gold, meanwhile, has been wandering aimlessly of late, although there is a growing hubbub about Bitcoin, which has traded to $18k this morning.

Finally, to the dollar, which is clearly under pressure virtually across the board this morning.  In the G10 space, NOK (+0.55%) is the leader, following oil prices higher as ongoing enthusiasm over a vaccine driven recovery continues to be felt.  But we are seeing gains in SEK (+0.4%), once again showing its deserved status as a high beta currency, and JPY (+0.2%), which has recouped more than half of its very sharp decline seen last Monday in the wake of the first vaccine announcement.  As this doesn’t appear to be a risk-off scenario, I would attribute the yen’s gains more to the dollar’s broad weakness than anything else.  However, do not be surprised if we test, and this time break, 103.00 before too long.

Emerging market currencies are also broadly stronger, but the movement has been fairly contained.  Leading the pack is CLP (+0.7%) as copper prices are benefitting from the vaccine enthusiasm, as well as RUB (+0.6%) on the back of oil’s strength.  After that, the gains are far less impressive, but they are evident across all three major blocs.  On the downside, today’s notable loser is THB (-0.5%) as the central bank there commented on the baht’s recent strength (+3.0% in the past two weeks) and is set to unveil a package to rein in that strength.

On the data front, yesterday saw weaker than expected Retail Sales numbers here in the States, although that didn’t have much impact on things.  Overnight we have seen CPI data from Europe, which was largely in line with expectations and remains right near 0.0%.  This morning brings Housing Starts (exp 1460K) and Building Permits (1567K), which also seem unlikely to have much impact.  Four more Fed speakers are on the docket, but unlike the ECB, there doesn’t seem to be much disagreement on what needs to be done in the US (more fiscal stimulus, please!)

And that’s it really.  The dollar’s weakness feels a bit overdone in the very short term, but with this new attitude by the ECB, if I am correct, an eventual grind toward 1.21 seems possible.  However, do not mistake that for a dollar collapse in any way, shape or form.

Good luck and stay safe
Adf

More Money They’ll Print

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While stock markets make all-time highs
The world’s central banks still advise
More money they’ll print
In case there’s a hint
That prices will simply not rise

In a chicken and egg type question, it is worth asking; is the fact that equity markets continue to rally (yet another all-time high was recorded yesterday, this time by the Dow) despite the fact that economies worldwide remain in chaos and operating at a fraction of their capacity, as governments impose another wave of lockdowns throughout Europe, the UK and many US states, logical?  Obviously, the link between those dichotomous outcomes is the support provided by the central banking community.  Perhaps the way to frame the question is, if markets have already seen past the end of the pandemic, and are willing to fund the business community right now, why do central banks feel they need to, not merely continue with their programs, but promise to increase them going forward?

This was made clear, yet again, when Fed Vice-Chair, Richard Clarida, explained that the FOMC is carefully evaluating the current situation and will not hesitate to use all available tools to help support the economy.  The punditry sees this as a code for an increase in the size of the asset purchase program, from the current $120 billion each month (split $80 billion Treasuries and $40 billion mortgages) to as much as $160 billion each month, with the new money focused on Treasuries.  At the same time, ECB Chief Economist, Philip Lane, explained that the central bank will provide enough monetary stimulus to make sure governments, companies and households have access to cheap credit throughout the coronavirus crisis.

And perhaps, that is the crux of the problem we face.  Despite investor optimism that the future is bright, and despite central banks’ proven inability to get funding to those most in need, namely individual households, those same central banks continue to do the only thing they know how to do, print more money, and by extension fund governments and large companies, who already have access to funding.  As the saying goes, the rich get richer.

The cycle goes as follows: central banks cut interest rates => investors move out the risk curve seeking returns => corporations and governments issue more debt at cheaper levels => an excess (and ultimately unsustainable) amount of debt outstanding.  Currently, that number, globally, is approaching 400% of GDP, and on current trends, has further to go.  The problem is, repayment of this debt can only be achieved in one of two ways, realistically, neither of which will be pleasant.  Either, inflation actually begins to rise sufficiently to diminish the real value of the debt or we get to a debt jubilee, where significant portions are simply written off.

If you were ever wondering why central banks are desperate for higher inflation, this is your answer.  While they are mostly economists, they still recognize that inflation is exactly the kind of debt destructive force necessary to eventually balance the books.  It will take time, even if they can manage the rate of inflation, but their firmly held belief is if they could just get inflation percolating, all that debt would become less of a problem.  At least for the debtors. Creditors may not feel the same excitement.

On the other hand, the debt jubilee idea is being bandied about in many forms these days, with the latest being the cancellation of student debt outstanding.  That’s $1.6 trillion that could be dissolved with the signing of a law.  Now, who would pay for that?  Well, I assure you it is not a free lunch.  In fact, the case could be made that it is this type of action that will lead to the central banks’ desired inflation outcome.  Consider, wiping out that debt would leave $1.6 trillion in the economy with no corresponding liabilities.  That’s a lot of spending power which would suddenly be used to chase after a still restricted supply of goods and services.  And that is just one small segment of the $100’s of trillions of dollars of debt outstanding.  The point is, there are still many hard decisions yet to be made and there are going to be winners and losers based on those decisions.  Covid-19 did not cause these issues to arise, it merely served as a catalyst to make them more widely known, and potentially, will push us toward the endgame.  Be prepared!

But that is all just background information to help us try to understand market activity a bit better.  Instead, let’s take a look at the market today, where yesterday’s risk appetite seems to have developed a bit of indigestion.  Overnight saw a mixed equity picture (Nikkei +0.4%, Hang Seng +0.1%, Shanghai -0.2%) with the magnitude of movements more muted than recent activity.  Europe, on the other hand, has been largely in the red (DAX -0.35%, CAC -0.3%, FTSE -1.15%) as apparently Mr Lane’s comments were not seen as supportive enough, or, more likely, markets are simply overbought after some enormous runs this month, and are seeing a bit of profit taking.  US futures are mixed at this point, with the DOW and S&P both down -0.5%, while the NASDAQ is up about 0.3%.  The biggest stock market story is S&P’s decision to add Tesla to the S&P500 index starting next month, which has helped goose the stock higher by another 10%.

Bond markets this morning are a tale of three regions.  Asian hours saw Australian and New Zealand bonds fall sharply with 10-year yields rising about 7 basis points, as the RBA’s YCC in the 3-year space is starting to really distort markets there.  However, in Europe, we are seeing a very modest bond rally, with yields slightly softer, about 1 basis point throughout the continent, and Treasuries have seen yields slip 1.5 basis points so far in the session. Clearly, a bit of risk-off attitude here.

FX markets, however, are not viewing the world quite the same way as the dollar, at least vs. its G10 counterparts, is somewhat softer, although has seen a more mixed session vs. EMG currencies.  Leading the way in the G10 is GBP (+0.5%) as stories make the rounds that a Brexit deal will be agreed next week.  Now, they are just stories, with no official comments, but that is the current driver.  Next in line is JPY (+0.3%) which perhaps we can attribute to a risk-off attitude, especially as CHF (+0.25%) is moving the same way.  As to the rest of the bloc, gains have been much smaller, and there has been absolutely zero data released this morning.

In the EMG bloc, EEMEA currencies have been the weak spot, with HUF (-0.5%) the worst performer, although weakness in PLN (-0.3%) and RUB (-0.25%) is also clear.  This story has to do with the Hungarian and Polish vetoes of the EU budget and virus recovery fund, as they will not accept the rule of law conditions attached by Brussels.  You may have heard about the concerns Brussels has over these two nations move toward a more nationalist viewpoint on many issues like immigration and judicial framework, something Brussels abhors.  On the positive side, BRL (+0.5%) has opened strongly, and CNY (+0.45%) led the Asian bloc higher overnight.  The China story continues to focus on the apparent strength of their economic rebound as well as the fact that interest rates there are substantially higher than elsewhere in the world and drawing in significant amounts of investor capital.  As to BRL, it seems the central bank has hinted they will be increasing the amount of dollars available to the market, thus adding to pressure on the dollar.

On the data front, yesterday saw a weaker than expected Empire Mfg number, but this morning is really the week’s big number, Retail Sales (exp 0.5%, 0.6% ex autos) as well as IP (1.0%) and Capacity Utilization (72.3%) a little later. On the Fed front, we have Chairman Powell speaking at 1:00, but not a speech, part of a panel, as well as another five Fed members on the tape at 3:00.  However, I anticipate the only thing we will learn is that the entire group will back up Vice-Chair Clarida regarding additional actions.

Despite the lack of risk appetite, the dollar is on its back foot this morning.  Ironically, I expect that we will see a rebound in risk appetite, rather than a rebound in the dollar as the session unfolds.

Good luck and stay safe
Adf

Aged Like Bad Wine

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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
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Growth’s Pace Declining

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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
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