Was It Ever?

The BOJ asked
Is QE still effective?
Or…was it ever?

One of the constants in financial markets since 2012 has been the BOJ’s massive intervention in Japanese markets.  They were the first major central bank to utilize QE, although they call it QQE (Quantitative and Qualitative Easing – not sure what quality it brings) and have now reached a point where the BOJ owns more than 51% of the JGB market.  In fact, given their buy and hold strategy removes those bonds from trading, the liquidity in the JGB market has suffered greatly.  Remember, too, that JGB issuance is greater than 230% of the Japanese GDP, which means the BOJ’s balance sheet is larger than the Japanese economy, currently sitting at ~$6.74 Trillion or 133.2%.

But they don’t only purchase JGB’s, they are also actively buying equity ETF’s in Japan, and by using their infinite printing press have now become the largest single shareholder in the country with holdings of ~$435 Billion, or roughly 7.5% of all the equities outstanding in the country.  And you thought the Fed was pursuing an activist monetary policy!

The thing is, it is not hard to describe all these efforts as utter failures in achieving their aims.  Those aims were to support growth and push inflation up to 2.0%.  (As an aside, it is remarkable how 2.0% has become the ‘magic’ number for the right amount of inflation in central banking circles.  Thank you Donald Brash.)  However, a quick look at the history of inflation in Japan since Kuroda-san’s appointment to Governor of the BOJ in March 2013, and the latest surge in activist monetary policy, shows that the average inflation rate during his tenure as been 0.73%.  Inflation peaked in May 2014, in the wake of the GST hike (a tax rise on consumption) at 3.7%, and spent 12 months above the 2.0% level as that impact was felt, but then the baseline was permanently higher and inflation quickly fell back below 1.0%, never to consider another rise to that level.

Looking at growth, the picture is similar, with the average Q/Q GDP growth during Kuroda-san’s tenure just 0.1%.  It is abundantly clear that central bankers are no Einsteins, as they seem constantly surprised that the same strategies they have been using for years do not produce new results.  Perhaps you must be insane to become a central banker.

What makes this relevant today is that last night, it was learned that BOJ policymakers are considering some changes to their policies.   It’s current policy of YCC has short-term rates at -0.1% and a target for 10-year yields of 0.00% +/- 0.20% leeway.  They also currently purchase ¥12 Trillion ($115 Billion) of equity ETF’s per year.  However, their new plans indicate that they are going to change the mix of JGB purchases, extending the tenor and cutting back purchases of short-term bonds, while also allowing more flexibility in the movement of 10-year yields, with hints it could widen that band from the current 40bps to as much as 60bps.  While that may not seem like a lot, given the minimal adjustments that have been made to these policies over the past 8 years, any movement at all is a lot.

And the market took heed quickly, with JPY (-0.5%) falling to its weakest point vs. the dollar since mid-November.  Technically, USDJPY has broken through some key resistance levels and the prospects are for further USD appreciation, at least in the short run.

In China, the PBOC
Is worried that bubbles will key
More problems ahead
And to punters’ dread
Have drained out more liquidity

China is the other noteworthy story this morning, where the central bank has aggressively drained liquidity from the market as they remain extremely wary of inflating bubbles.  Overnight funding costs rose 29bps last night, to their highest level since March 2015.  Not surprisingly, Chinese equity markets suffered with Shanghai (-0.6%) and the Hang Seng (-0.95%) both unable to follow yesterday’s US rally.  (The Nikkei (-1.9%) also suffered as concerns were raised that the BOJ, in their revamp of policy, may choose to buy less equities.)  What is so interesting about this action is that if you ask any Western central banker about bubbles you get two general responses; first, they cannot tell when a bubble exists; and second, anyway, even if they could, it is not their job to deflate them.  Yet, the PBOC is very clear that not only can they spot a bubble, but they will address it.

I think it is fair to say that given the recent activity in certain stocks like GameStop and AMC, the US market is really exhibiting bubble-like tendencies.  Rampant speculation by individual investors is always a sign of a bubble.  We saw that in 1999-2000 during the Tech bubble, when people quit their day jobs to become stock traders and we saw that in the housing bubble of 2007-8, when people quit their day jobs to speculate in real estate and flip houses.   It also seems pretty clear that the combination of current monetary and fiscal policies has resulted in equity markets being the final repository of that cash.  Having lived, and traded, through the previous two bubbles, I can affirm the current situation exhibits all the same hallmarks, with one exception, the fact that central banks are explicitly targeting asset purchases.  However, this situation cannot extend forever, and at least one part of the financial framework will falter. When that starts, price action will become extremely volatile, similar to what we saw last March, but for a longer period of time, and market liquidity, which has already suffered, will get even worse.  All this points to the idea that hedging financial risk remains critical.  Do not be dissuaded by some volatility, because I assure you, it can get worse.

Anyway, a quick tour of markets shows some real confusion today.  Equities, which we saw fell sharply in Asia, are falling across Europe as well (DAX -0.8%), CAC (-0.9%), FTSE 100 (-1.0%) despite the fact that preliminary GDP data from the continent indicated growth in Q4 was merely flat, not negative. US futures are all pointing lower as well, between 0.5% and 0.9%.

Bonds, however, are all being sold as well, with Treasury yields rising 2.6bps, and European market seeing even greater rate rises (Bunds +3.3bps, OATs +3.3bps, Gilts +3.9bps).  So, investors are selling both stocks and bonds.  What are they buying?

Commodities are in favor this morning, with oil (+0.5%) and the ags rising, but precious metals are in even greater favor (Gold +1.1%, Silver +3.25%).  And finally, the dollar, is under broad pressure, with only the yen really underperforming today.  NOK (+0.9%) is leading the way in the G10, while the rest of the bloc, though higher, is less enthusiastic with gains ranging from 0.1%-0.3%.  Emerging market currencies are having a much better day, led by ZAR (+1.3%) on the back of the commodity rally, followed by TRY (+0.85%) and MXN (+0.45%).  CNY (+0.25%) has rallied on the back of the Chinese monetary actions and BRL (-0.1%) is the only laggard in the bloc as bets on rate hikes, that had been implemented earlier in the week, seem to be getting unwound.

There is important data this morning as well, led by Personal Income (exp 0.1%) and Personal Spending (-0.4%), but also Core PCE (1.3%), Chicago PMI (58.5) and Michigan Sentiment (79.3).  The PCE data has the best chance of being the most interesting, as a higher than expected print will get tongues wagging once more regarding the reflation trade and higher bond yields.

But, when looking at the markets in their totality, there is no specific theme.  Risk is neither on, nor off, but looks more confused.  If I had to describe things, I would say that fiat linked items are under pressure while real items are in demand.  Alas, given current monetary policy globally, I fear that is the future in a nutshell.  As to the dollar, relative to other currencies, clearly, today it is under the gun, but arguably, it is really just consolidating its recent modest gains.

Good luck, good weekend and stay safe

The Dollar’s Fate (In the Coming Year)

With apologies to Henry Wadsworth Longfellow

Listen, my children, and you shall hear
Of the dollar’s fate in the coming year
In the wake of a time that’s ne’er been seen
Since the Spanish Flu of Nineteen Eighteen
Perhaps Twenty-One will bring joy, not fear

Recapping Twenty shows that despite
A plague of biblical magnitude
The printing press revealed its might
As governments everywhere, debt, accrued
And flooded the markets with cash untold
(The better their citizens be controlled)
But all of that money was used, not for,
Increased production of goods onshore
Instead, for the purchase of stocks galore

Thus, equity markets at home rose higher
With Asia, too, on proverbial fire
Though Europe lagged, as the ECB
Was late to the party with more QE
Risk was embraced with a multiplier
Government bonds, though falling of late
Had seen yields tumble, year-to date
And lastly, the dollar, is now descending
As traders await this trend extending

Looking ahead, what can we expect?
Has Covid passed? Will ‘normal’ return?
Or are there surprises we’ve yet to learn?
Will stocks continue their flights of fancy?
Will bonds, inflation, at last detect?
Will dollars, everyone, start to spurn?
Will gold and bitcoin still seem chancy?

Regarding the virus, it’s not dead yet
Though hope springs eternal, and at last
The vaccines imply the worst has passed
But life, as we knew it, has been reset
Working from home (or living at work)
Is mainstream now, and not just a quirk
Office demand will certainly slide
And travel for business will lessen worldwide
Normal has changed, for boss and for clerk

Let us now speak of growth and inflation
Will growth improve on last year’s “success”?
Or will it instead fall flat and regress
Lockdown renewals bode ill for salvation
Policymakers constantly flail
As policy efforts constantly fail
Stimulus, fiscal, continues to flow
Interest rates are now forevermore low
Central banks tell us that this combination
Is perfect to counter a fearful stagnation
But in their efforts, good times to hail
The rising of prices will bypass their gaze
Leading to many more difficult days
GDP this year will struggle to One
Inflation, however, at Four, will not stun

How, then, will markets respond to this fate?
Equity prices at first will inflate
By spring, though, ‘twill be clear something’s amiss
Traders, their holdings, will start to truncate
While we shall not tumble into the abyss
Do not be shocked if the market does fall
Some twenty percent, at the least, is my call
What about bonds? How will they react?
Powell will ne’er let their prices contract
Yield Curve Control is the future we’ll see
Alongside the horror of pure MMT
Hence, ten-year bonds when December arrives
Will keep up their value, a cat with nine lives
One percent will be the height they attain
Implying the real yield most certainly dives
And so, the dollar will suffer great pain

Starting in Europe where Madame Lagarde
Is trying to keep up with Fed Chairman Jay
Sadly, what’s clear, at the end of the day
The ECB’s structure will make it too hard
While Fed and the Treasury work hand in hand
Pushing more money throughout all the land
Treaties in Europe have outcomes, unplanned
PEPP’s not enough for a rebound unscarred

Even though growth throughout Europe will sag
Even though prices will still be a drag
Nothing Lagarde can create will impact
The outcome, a euro that’s sure to move higher
Thus, if it’s something you need to acquire
At year-end, One-Thirty, you’ll need, that’s a fact

Tumultuous best describes last year’s UK
Twixt Covid and Brexit, the nation felt pain
Unhappily, this year, to Johnson’s dismay
Could worsen for every old bloke on the street
With growth in the toilet while prices show heat
It doesn’t seem much like Pound Sterling could gain

But real rates keep diving throughout the US
Offsetting those troubles, so if you need quid
Come Christmas, One-Fifty, if I had to guess
Is what they will cost as the dollar’s declined
Looking elsewhere, perhaps north of the border
Canada still seems a bit out of order
Oil’s rebounded but still seems confined
Meanwhile, housing there is quite well bid

However, again, it is Fed Chairman Jay
Who’s promised support for considerable time
Thus, when we get to our next Boxing Day
One-Fifteen for Loonies you’ll see on your screen
Eastward now, let’s turn our gaze as we glean
Whether the yen can continue its climb
Long-term, the dollar, its trend has been clear
Even before the debasement of late
Several percent, like a clock every year
Why would this year, something new, demonstrate?

Frankly, it won’t, as the Fed’s in control
Rather, the yen, will continue to roll
So, Winter Solstice this year will reveal
Dollar-Yen, Ninety-Six, where you can deal
Let us turn now to both future and past
Bitcoin and gold, which have both been amassed
Can both their prices continue to rise?
Certainly, as they’ve restricted supplies

For centuries, gold has defined what’s secure
Its glitter unblemished while paper’s debased
So, don’t be surprised if the relic’s embraced
As buyers pay Three Grand their wealth to insure
But youth has ideas which to many seem odd
And bitcoin is one such that’s been called a fraud
So, is it? Or is Bitcoin digital gold?
An updated version important to hold
As fiat debasement continues apace
This digital token gains further allure
And this year it seems Bitcoin’s making its case
As something that everyone needs to procure

It’s starting this year right around thirty grand
And hodlers believe that ‘tween here and the sky
Unless countries call for Bitcoin to be banned
A doubling or tripling’s the gain they’ll apply
One last thing I’ll highlight in digital space

The DCEP is now leading the race
This digital yuan, the first CBDC
Is coming soon courtesy of Mr Xi
It’s impact initially is quite unclear
But I guarantee that inside of a year
Nations worldwide will each roll out their own
And each will define a DC trading zone

While last year was filled with surprises galore
This year we’re likely to see many more
And finally, thank you, my readers and friends
For listening to all the twists and the bends
Now looking ahead to Twenty Twenty-One
Let’s all keep perspective and try to have fun.

Good luck, stay safe and have a wonderful new year

DCEP = Digital Currency / Electronic Payment
CBDC = Central Bank Digital Coin

Waiting for Jay

Investors are waiting for Jay
Their fears, about rates, to allay
They want it made clear
That rates will be here
From now ‘til we reach judgement day

From the market’s perspective, the world has essentially stopped spinning, at least until we finally hear the words of wisdom due from Chairman Powell beginning at 9:10 this morning.  Trading volumes across products are currently running at 50%-70% of recent average activity, highlighting just how little is ongoing.  And remember, too, as it is the last week of August, summer holidays are in full swing with most trading desks, on both the buy and sell sides, more lightly staffed than usual.  In other words, liquidity is clearly impaired right now, although by 10:00 this morning I expect that things will be back closer to normal.

As discussed yesterday, the working assumption of most analysts and investors is that Jay is going to explain the benefits of targeting average inflation over time.  The implication being that the Fed’s new policy framework, when officially announced later this year, is going to include that as a KPI.  Of course, the big question about this policy is the average over exactly which period.

Consider, it has been 102 months since then-Chairman Bernanke established the target for core PCE at 2.0%.  During that time, core PCE has been between 1.9% and 2.1% just 12 times with 89 of the other 90 readings below 1.9% and a single print above 2.1%, which happens to have been the first print after the announcement.  Meanwhile, this past April’s reading of 0.931% is the lowest reading.  The average of the two extremes is 1.53%.  Is the Fed going to be happy if core PCE jumps to 2.47% and stays there for a while?  The average of all periods since January 2012 is 1.633%, does that mean we can expect the Fed to target 2.367% core PCE readings for the next eight plus years? The point is, without some specificity on what average inflation means, it is very difficult to understand how to incorporate the idea into investment and trading decisions.

But what if Chairman Powell does not bring clarity to the discussion, merely saying that average inflation over time seems like a good future benchmark.  How might different markets react to such a lack of specificity?

Starting with equity markets, certainly those in the US will rally because…well that’s all they do these days.  Good news, bad news, no news, none of that matters.  The rationale will be stocks are a good inflation hedge if inflation goes higher (they’re not) or stocks will benefit from ongoing low interest rates if inflation remains below target.  Parabolic markets are frightening, but there is no indication that Powell’s comments are going to change that situation.  We need a different catalyst here.

Now let’s look at the bond market and what might happen there.  Specificity on how much higher the Fed is going to target inflation is going to be a pretty distinct negative.  If you own 10-year Treasuries that are yielding 0.68% (today -1bp), and the Fed explains that they are going to push inflation above 2.0%, there is going to be a pretty spectacular decline in the price of your bond should they achieve their goal.  Will investors be willing to hold paper through that type of decline?  It would not be a surprise to see a pretty sharp sell-off in Treasuries on that type of news.  Remember, too, that Treasury yields have backed up nearly 20 basis points in the past three weeks, perhaps in anticipation of today’s comments.  If Powell delivers, there is likely far more room to run.  If he doesn’t, and there is no clarity, bond investors will be back to reading the economic tea leaves, which continues to be remarkably difficult at this time.

How about the gold market?  Well, here I think the case is quite straight forward.  Clarity as to the Fed’s efforts to drive inflation higher will result in anticipation of lower real yields, and that will be an unalloyed benefit (pun intended).  A lack of clarity and gold will likely continue to consolidate its recent gains.

And finally, what about the dollar?  How will it respond to the Chairman’s speech?  Consider that despite the dollar’s recent rebound, short dollar positions remain at near record levels against both the euro and the DXY futures.  The market scuttlebutt is that the hedge fund community, which was instrumental in the dollar’s recent modest strength as they pared short dollar positions, is ready and raring to buy euros on the idea that higher US inflation will lead to a weaker dollar à la economic theory.  Certainly, if Treasuries sell off, the dollar will see some downward pressure, but one of the things that does not get as much press in the FX market is the equity market impact.  Namely, as long as US equity indices continue to set records, international investors are going to continue to buy them, which will underpin the dollar.

But what if the speech is a dud?  If there is no clarity forthcoming, then the dollar story will revert to its recent past. The bear case continues to be that the Fed’s largesse will dwarf all other nations’ policy easing and so the dollar should resume its decline.  The bull case is that the US economy, at least by recent data, appears to continue to be outperforming its major counterparts, and thus inward investment flows will continue.  That current account deficit is only a problem if international investors don’t want to fund it, and with US equity markets amongst the best performing asset classes globally, that funding is easy to find.  I know I’m not a technician, but recent price action certainly appears to have created a top at the highs from last week, and a further pullback toward 1.1650 seems quite viable.

It is difficult to draw many conclusions from today’s market activity, which is why I have largely ignored it.  Equity markets are leaning a bit lower, although the movement is not large, less than 1%, and the dollar is mixed against both the G10 and EMG blocs.

Arguably, the biggest market risk is that Powell doesn’t tip his hand at all, and that we are no wiser at 10:10 than we are now.  If that is the case, I think the dollar’s consolidation will continue, and by the end of the day, I imagine stock prices will have recouped their early losses.

But for today, it is all about Jay.

Good luck and stay safe

Prices Bespeak

It seems that the rate of inflation
Is rising across our great nation
Demand remains weak
But prices bespeak
The need for some new Fed mentation

Does inflation still matter to markets? That is the question at hand given yesterday’s much higher than expected, although still quite low, US CPI readings and various market responses to the data. To recap, CPI rose 0.6% in July taking the annual change to 1.0%. The core rate, ex food & energy, also rose 0.6% in July, which led to an annual gain of 1.6%. For good order’s sake, it is important to understand that those monthly gains were the largest in quite a while. For the headline number, the last 0.6% print was in June 2009. For the core number, the last 0.6% print was in January 1991!

The rationale for inflation’s importance is twofold. First, and foremost, the Fed (and in fact, every central bank) is charged with maintaining stable prices as a key part of their mandate. As such, monetary policy is directly responsive to inflation readings and designed to achieve those targets. Second, economic theory tells us that the value of all assets over time is directly impacted by the change in the price level. This concept is based on the idea that investors and asset holders want to maintain the real value of their savings (and wealth) over time so that when they need to draw on those savings, they can maintain their desired level of consumption in the future.

Of course, the Fed has made a big deal about the fact that inflation remains far too low and one of the stated reasons for ZIRP and QE is to help push the inflation rate back up to their 2.0% target. Remember, too, that target is symmetric, which means that they expect inflation to print higher than their target as well as lower, and word is, come the September meeting, they are going to formalize the idea of achieving an average of 2.0% inflation over time. The implication here is that they are going to be willing to let the inflation rate run above 2.0% in order to make up for the last decade when their preferred measure, core PCE, only touched 2.0% in 11 of the 103 months since they established the target.

Looking at the theory, what we all learned in Economics 101 was that higher inflation led to higher nominal interest rates, higher gold prices and a weaker currency. The equity question was far less clear as there are studies showing equities are a good place to be and others showing just the opposite. A quick look at the market response to yesterday’s CPI data shows that yields behaved as expected, with 10-year Treasuries seeing yields climb 3.5 basis points. Gold, on the other hand, had a more mixed performance, rallying 1.0% in the first hours after the release, but ultimately falling 1.0% on the day. And finally, the dollar also behaved as theory would dictate, falling modestly in the wake of the release, probably about 0.25% on average.

So yesterday, the theory held up quite well, with markets moving in the “proper” direction after the news came out. But a quick look at the longer-term relationship between inflation and markets tells a bit of a different story. The correlation between US CPI and EURUSD has been 0.01% over the past ten years. In the same timeframe, gold’s correlation to CPI has actually been slightly negative, -0.05%, while Treasury yields have shown the only consistent relationship with the proper sign, but still just +0.2%.

What this data highlights are not so much that inflation impacts market prices, but that we should only care about inflation, from a market perspective at least, because the Fed (and other central banks) have made it part of their mantra. Thus, the answer to the question, does inflation still matter is that only insofar as the Fed continues to care about it. And what we have gleaned from the Fed over the past five months, since the onset of the covid pandemic, is that inflation is way down their list of priorities right now. In other words, look for higher inflation readings going forward with virtually no signal from the Fed that they will respond. At least, not until it gets much higher. If you were wondering how we could get back to the 1970’s situation of stagflation, we are clearly setting the table for just such an outcome.

But on to markets today. Risk is under a bit of pressure this morning as equity markets in Asia and Europe were broadly lower, the only exception being the Nikkei (+1.8%) which saw a large tech sector rally drive the entire index higher. Europe, on the other hand, is a sea of red although only the FTSE 100 in London is down appreciably, -1.1%. And at this hour, US futures are essentially flat.

Bond markets are less conclusive today. Treasury yields are lower by 1 basis point at this hour, although that is well off the earlier session price highs, but European government bond markets are actually falling today, with yields edging higher, despite the soft equity market performance. As to gold, it is currently higher by 1.0%, which simply takes it back to the level seen at the time of yesterday’s CPI release.

Turning to the dollar, it is definitely softer as in the G10, only NZD (-0.3%), which seems to be responding to the sudden recurrence of Covid-19 cases in the country, is weaker than the greenback. But NOK (+0.6%) with oil continuing to edge higher, leads the pack, followed closely by the euro and pound, both of which are firmer by 0.5% this morning. Perhaps French Unemployment data, which showed an unemployment rate of just 7.1% instead of the 8.3% forecast, is driving the bullishness. But arguably, we are simply watching the continuation of the dollar’s recent trend lower.

In the emerging markets, the CE4 are all solidly higher as they track the euro’s movement with a bit more beta. But the rest of the space has seen almost no movement with those currency markets that are open showing movement on the order of +/- 10 basis points. In other words, there is no real story here to tell.

On the data front, we get the weekly Initial Claims (exp 1.1M) and Continuing Claims (15.8M) data at 8:30, but that is really all there is. We continue to hear from some Fed speakers, with today bringing Bostic and Brainard, but based on what we have heard from other FOMC members recently, there is nothing new we will learn. Essentially, the Fed continues to proselytize for more fiscal support and blame all the economy’s problems on Covid-19, holding themselves not merely harmless for the current situation, but patting themselves on the back for all they have done.

With this in mind, it is hard to get excited about too much activity today, and perhaps the best bet is the dollar will continue to drift lower for now. While the dollar weakening trend remains intact, it certainly has lost a lot of its momentum.

Good luck and stay safe



This morning the UK released
Fresh data that showed growth decreased
By quite an extent
(Some twenty percent)
Last quarter. Boy, Covid’s a beast!

But really the market’s transfixed
By gold, where opinions are mixed
It fell yesterday
An awfully long way
With shorts praying it’s been deep-sixed

Two stories are vying for financial market headline supremacy this morning; the remarkable collapse in gold (and silver) prices, and the remarkable collapse in the UK economy in Q2. And arguably, they are sending out opposite messages.

Starting with the gold price, yesterday saw the yellow metal fall nearly 6%, which translated into $114/oz decline. On a percentage basis, silver actually fell far further, -14.7%, although for now let’s simply focus on gold. The question is, what prompted such a dramatic decline? Arguably, gold’s rally has been based on two key supports, the increasingly larger negative real yield in US interest rate markets and an underlying concern over the impact of massive monetary stimulus by the Fed and other central banks undermining all fiat currencies. These issues drove a speculative frenzy where gold ETF’s were trading above NAV and demand for physical metal was increasing faster than production.

Looking at the real yield story, last Thursday saw the nadir, at least so far, in that metric, with real10-year Treasury yields falling to -1.08%. However, as risk appetite recovered a bit, nominal yields rebounded by 10bps, and real yields did the same, now showing at ‘just’ -0.99%. At this point, it is important to remember that markets move at the margin, so even though real yields remain highly negative, the modest rebound changed the tone of the trade and encouraged a bout of profit-taking in gold. Simultaneously, we saw a much more positive risk environment, especially after Germany’s ZEW survey showed much better than forecast Expectations, pumping up European equity markets and US ones as well. This simply added to the rationale to take profits on what had been a very sharp, short-term increase in the precious metals markets. As these things are wont to do, the selling begat more selling and bingo, a major correction resulted.

Is this the end of the gold story? I sincerely doubt it, as the underlying drivers are likely to continue their original trend. If anything, what we continue to see from central banks around the world is additional stimulus driving ever lower nominal and real yields. We saw this last night in New Zealand, where the RBNZ increased their QE program and openly discussed NIRP, pushing kiwi (-0.5%) lower. But in this context, the important issue is that, yet another G10 central bank is leaning closer to negative nominal yields, which will simply drive real yields even lower. Simultaneously, additional QE is exactly the issue driving concern over the ultimate value of fiat currencies, so both key factors in gold’s rise are clearly still relevant and growing today. Not surprisingly, gold’s price has rebounded about 1.0% this morning, although it did fall an additional 2.5% early in the Asian session.

As to the other story, wow is all you can say. Q2 GDP fell 20.4% in the UK, more than double the US decline and the worst G10 result by far. Social distancing is a particularly damaging policy for the UK economy because of the huge proportion of services activity that relies on personal contact. But the UK government’s relatively slow response to the outbreak clearly did not help the economy there, and the situation on the ground indicates that there are still several pockets of rampant infection. One thing working in the UK’s favor, and thus the pound’s as well, is that despite the depths of the Q2 data, recent activity reports on things like IP and capital formation have actually been better than expected. The point is, this data, while shocking, is old news, as is evidenced by the fact that the pound is unchanged on the day while the FTSE 100 is higher by more than 1% as I type.

So, what are the mixed messages? Well, the collapse in gold prices on the back of rising yields would ordinarily be an indication of a stronger than expected economic result, as increased activity led to more credit demand and higher yields. But the UK GDP result is just the opposite, a dramatic decline that has put even more pressure on both PM Johnson’s government as well as the BOE to increase fiscal and monetary stimulus, thus driving yields lower and debasing the currency even further. So which story will ultimately dominate? That, of course, is the $64 trillion question, but for now, my money is on weaker growth, lower yields and a gold rebound.

Not dissimilar to the mixed messages of those two stories, today’s session has seen a series of mixed outcomes. For instance, equity markets are showing no consistency with both gainers (Nikkei +0.4%, Hang Seng +1.4%) and losers (Shanghai -0.6%) in Asia with similar mixed action in Europe (CAC +0.4%, DAX 0.0%, Stockholm -0.5%). Not to worry, US futures are pointing higher across the board by roughly 0.75%.

Bond markets, however, are pretty consistent, with 10-year yields higher in virtually every market (New Zealand excepted), as Treasuries rise 2.5bps, UK gilts a similar amount and German bunds a bit more than 3bps. In fact, Treasury yields, now at 0.67%, are 17bps higher in the past 6 sessions, the largest move we have seen since May. But again, I see no evidence that the big picture stories have changed nor any reason for US yields, at least in the front end, to rebound any further. One can never get overly excited by a single day’s movement, especially in as volatile an environment as we currently sit.

Finally, the dollar, too, is having a mixed session, with kiwi the leading decliner, but weakness also seen in JPY (-0.45%) and AUD (-0.25%). Meanwhile, the ongoing rally in oil prices continues to support NOK (+0.55%), with SEK (+0.45%) rising on the back of firmer than expected CPI data this morning. (As an aside, the idea that we are in a massively deflationary environment is becoming harder and harder to accept given that virtually every nation’s inflation data has been printing at much higher than expected levels.)

EMG currencies, keeping with the theme of the day, are also mixed, with TRY (-1.3%) the worst in the world as investors and locals continue to flee the currency and the country amid disastrous monetary policy activity. IDR (-0.55%) is offered as Covid cases continue to rise and despite the central bank’s efforts to contain its weakness, and surprisingly, RUB (-0.25%) is softer despite oil’s rally. On the plus side, the gains are quite modest, but CZK (+0.3%) and ZAR (+0.3%) lead the way with the former simply adding to yesterday’s gains while the rand seemed to benefit from a positive economic survey result.

This morning brings US CPI (exp 0.7%, 1.1% ex food & energy) on an annual basis, but as Chairman Powell and his minions have made clear, inflation is not even a top ten concern these days. However, if we see a higher than expected print, it is entirely realistic to see Treasury yields back up further.

Overall, the dollar remains under modest pressure, but one has to wonder if yesterday’s gold price action is a precursor to a correction here as well. Remember, positioning is extremely short the dollar, so any indication that the Fed will be forced to address inflation could well be a signal for position reductions, and hence a dollar rebound.

Good luck and stay safe


Faded Away

It started when Trump hinted that
The capital gains tax was at
A rate much too high
And cuts were close by
His words, thus, a rally begat

Then Germany joined in the fray
As data from their ZEW survey
Exploded much higher
Now stocks are on fire
While havens have faded away

It used to be that you could determine the nature of a nation’s government by their response time to major events. So, autocratic nations were able to respond extremely quickly to negative events because a single man (and it was always a man) made the decisions and those who didn’t follow orders found themselves removed from the situation. Conscientious objection was not a viable alternative. Meanwhile, democratically elected governments always took more time to react because the inherent nature of democratic debate was slow and messy, with everyone needing to make their case, and then a majority formed to move forward.

This broad view of government decision-making was generally true for as long as economies were based on the production of real goods and services. However, that economic model has been essentially retired and replaced by the new concept of financialization. This is the process by which private actors recognize there is more value to be obtained (and with less risk!) if they spend their time and effort re-engineering their balance sheet rather than investing in their underlying business.

The upshot of the financialization of economies is that government response times to crises have been shortened remarkably. (It is important to understand that in this context, central banks, despite their “independence”, are part of the government). So, now even democratically elected governments can respond with alacrity to ongoing crises. This begs the question of whether democratically elected governments have become more autocratic (lockdowns anyone?), or whether this is simply the natural evolution of the democratic process when combined with media tools like Facebook and Twitter, where responses can be formulated and disseminated in minutes.

At any rate, the key observation is that government officials everywhere have taken the combination of financialization and high-speed response quite seriously, and we now get policies floated and implemented in a fraction of the time it used to take. The main reason this can be done is because policies that address financial questions are much easier to implement than policies that address production bottlenecks. After all, it is a lot easier for the Fed to decide to buy Fallen Angels than it is for 535 people, many of whom hate each other, to agree on a package of policies that might help support small businesses and shop owners.

This has been a build-up to help understand the key theme today: risk is back!! Or perhaps, the proper statement is risk-on is back. Last evening, President Trump floated the idea that a capital gains tax cut was just the remedy to help the US economy get back on its feet. But the reality is that the only thing a capital gains tax cut will accomplish is to help boost the stock market further. After all, the S&P 500, after yesterday’s modest 0.3% rally, is still 1.0% below its all-time high. Such lagging performance cannot be tolerated apparently, hence the genesis of this idea. But it was enough to achieve its goal, a further boost in equity markets worldwide.

A quick look at markets overnight shows the Nikkei (+1.9%) and Hang Seng (+2.1%) followed the bullish sentiment, although surprisingly, Shanghai (-1.1%) could not hold onto early gains. Even with that decline, the Shanghai Composite is up more than 5% in the past two weeks, hardly a true laggard. Meanwhile, Europe has really taken the bit in its teeth and is flying this morning, getting a good start from the Asian movement and then responding extremely positively to the German ZEW survey results where the Expectations component printed at 71.5, its highest level since December 2003. So, despite the growth in Covid cases in Germany, the business community is looking forward to robust times in the near future. This was all equity traders and investors needed to see to get going and virtually every European bourse is higher by more than 2.2% this morning. Of course, it would not be a successful outcome if US markets didn’t rise as well, and futures this morning are all green, pointing to between 0.5% (NASDAQ) and 1.0% (DJIA) gains on the opening.

Naturally, the risk on environment has resulted in Treasury bond sales. After all, there is no need to own something as pedantic as a bond when not only are stocks available, but the tax rate on your gains is going to be reduced! And so, 10-year Treasury yields have risen 3bps this morning, and are back at 0.60%, 10bps higher than the new lows seen just one week ago today. And that price behavior is common amongst all European government bond markets, with German bund yields higher by 3.3bps and UK gilts nearly 4bps higher.

But the biggest victim of this move has clearly been gold, which has tumbled 2% this morning and is back below $2000/oz for the first time in a week. There is no question that precious metals markets have been getting a bit frothy, so this pullback is likely simple profit taking and not a change in any trend.

Finally, as we turn to the dollar, the risk-on attitude is playing out in its traditional fashion this morning, with the buck falling against 9 of its G10 counterparts with only the yen weaker versus the dollar. NOK (+0.8%) is the big gainer, rallying on the back of the ongoing rally in oil prices (WTI +2.5%), but we are seeing solid gains of roughly 0.4% across most of the rest of the bloc. The one laggard, aside form JPY (-0.14%), is the pound where the UK released employment data today that simply demonstrated how difficult things are there. This seems to have held the pound back as it is only higher by 0.2% this morning.

In the EMG space, RUB and ZAR (both +0.8%) are the leaders with the former clearly an oil beneficiary, while the latter, despite gold’s decline, has been the beneficiary of the hunt for yield as South Africa continues to have amongst the highest real yields in the world. But pretty much the whole bloc is in the green today as the simple concept of risk-on is the driver.

On the data front, the NFIB Small Business Index disappointed at 98.8, a clear indication that a capital gains tax cut does not seem to be the best solution for the economy. At 8:30 we get PPI (exp -0.7% Y/Y, +0.1% Y/Y core) but not only is this data backwards looking, the Fed has basically told us they don’t care about inflation at all anymore. We also hear from two Fed speakers, Barkin and Daly, but again, there is very little new that is likely to come from their comments.

Today is a risk-on day and after a brief consolidation, the dollar feels like it has further room to decline. Versus the euro, I imagine a test of 1.20 is coming soon, but it is not clear to me how much further we can go from there. As such, for receivables hedgers, adding a little to the mix at current levels is likely to be a good strategy.

Good luck and stay safe

Hardly a Sign

The thing that I don’t understand
Is why people think it’s not planned
The dollar’s decline
Is hardly a sign
The FOMC’s lost command

Based on the breathless commentary over the weekend and this morning, one would have thought that the dollar is in freefall.  It’s not!  Yes, the dollar has been sliding for the past two months, but that is a blink of an eye compared to the fact that it has been trending higher since its nadir a bit more than twelve years ago.  In fact, if one uses the euro as a proxy, which many people do, at its current level, 1.1725 as I type, the single currency remains below the average rate over its entire life since January 1999.  The point is, the current situation is hardly unprecedented nor even significant historically, it is simply a time when the dollar is weakening.

It is, however, instructive to consider what is happening that has the punditry in such a tizzy.  Arguably, the key reason the dollar has been declining lately is because real US interest rates have been falling more rapidly than real rates elsewhere.  After all, the Eurozone has had negative nominal rates since 2014.  10-year German bunds went negative in May 2019 and have remained there ever since.  Given that inflation has been positive, albeit weak, there real rates have been negative for years so the world is quite familiar with negative rates in Europe.  The US story, however, is quite different.  While nominal rates have not yet crossed the rubicon, real rates have moved from positive to negative quite recently and done so rapidly.  So, what we are really witnessing is the FX market responding to this relative change in rates, at least for the most part.  Undoubtedly, there are dollar sellers who are bearish because of their concerns over the macro growth story in the US, the second wave of Covid infections in the South and West and because of the growth in US debt issuance.  But history has shown that the most enduring impacts on a currency’s value are driven by relative interest rates and their movement.  And that is what we are seeing, US rates are falling relative to others and so the dollar is falling alongside them.

In other words, the current price action is quite normal in the broad scheme of things, and not worthy of the delirium it seems to be inspiring.  As I mentioned Friday, this is also what is driving the precious metals complex, which has seen further strength this morning (XAU +$40 or 2.1%, XAG +$1.50 or 6.7%).  And it must be noted that gold is now at a new, all-time nominal high of $1943/oz.  But since we are focusing on the concept of real valuation, while the price is higher than we saw in 2011 on a nominal basis, when adjusted for inflation it still lags pretty substantially, by about 18%, and both current and 2011 levels are significantly below gold’s inflation adjusted price seen in 1980 right after the second oil crisis.

However, the fact that the current reporting of the situation appears somewhat overhyped does not mean that the dollar cannot fall further.  And in fact, I expect that to be the case for as long as the Fed continues to add liquidity, in any form, to the economy.  Markets move at the margin, and the current marginal change is the decline in US real interest rates, hence the dollar is likely to continue to fall if US rates do as well.

The current dollar weakness begs the question about overall risk attitude.  So, a quick look around equity markets globally today shows a mixed picture at best, certainly not a strong view in either direction.  For instance, last night saw the Nikkei edge lower by 0.2% (after having been closed since Wednesday) and the Hang Seng (-0.4%) also slide.  But Shanghai (+0.25%) managed to eke out small gains.  In Europe, the DAX (+0.3%) is pushing ahead after the IFO figures bounced back much further than expected, although the CAC and FTSE 100 (-0.2% each) have both suffered slightly.  A special mention needs to be made for Spain’s IBEX (-1.3%) as the sharp increase in Covid infections seen in Catalonia has resulted in several European nations, notably the UK and Sweden, reimposing a 14-day quarantine period on people returning from Spain on holiday.  Naturally, the result is holidays that had been booked are being quickly canceled.  As to US futures, they are currently in the green, with the NASDAQ up 1.0%, although the others are far less enthusiastic.

Bond markets continue to show declining yields, with Treasuries down another basis point plus and now yielding 0.57%.  Bunds, too, are seeing demand, with yields there down 3 bps, although both Spanish and Italian debt are being sold off with yields edging higher.  In other words, the bond market is not pointing to a risk-on session.

Finally, the dollar is weak across the board, against both G10 and EMG currencies.  In the latter bloc, ZAR is the leader, up 1.3% on the back of the huge rally in precious metals, but we are also seeing the CE4 currencies all keeping pace with the euro, which is higher by 0.6% this morning.  As a group, those four currencies are higher by about 0.65%.  Asian currencies also performed well, but not quite to the standards of the European set, but it is hard to find a currency that declined overnight.  In G10 space, the SEK is the leader, rising 1.0%, cementing its role as the highest beta G10 currency.  But we cannot forget about the yen, which has rallied 0.75% so far this morning, and is now back to its lowest level since the Covid spike, and before that, prices not seen since last August.  A longer-term look at the yen shows that 105 has generally been very strong support with only the extraordinary events of this past March driving it below that level for the first time in four years.  Keep on the lookout for a move toward those Covid inspired lows of 102, although much further seems hard to believe at this point.

On the data front, this week’s highlight is undoubtedly the FOMC meeting on Wednesday, but there is plenty to see.

Today Durable Goods 7.0%
  -ex Transport 3.6%
Tuesday Case Shiller Home Prices 4.10%
  Consumer Confidence 94.4
Wednesday FOMC Rate Decision 0.0% – 0.25%
Thursday GDP Q2 -35.0%
  Personal Consumption -34.5%
  Initial Claims 1.445M
  Continuing Claims 16.3M
Friday Personal Income -0.5%
  Personal Spending 5.4%
  Core PCE 0.2% (1.0% Y/Y)
  Chicago PMI 43.9
  Michigan Sentiment 72.8

Source: Bloomberg

Of course, the GDP data on Thursday will be eye opening, as a print anywhere near forecasts will be the largest quarterly decline in history.  However, that is backward looking.  Of more importance, after the Fed of course, will be the Initial Claims data, which last week stopped trending lower.  Another tick higher there and the V-shaped recovery narrative is likely to be mortally wounded.  As to the Fed, while we will discuss it at length later this week, it seems unlikely they will do or say anything that is going to change the current market sentiment.  And that sentiment continues to be to sell dollars.

Good luck and stay safe





About to Retrace

The question investors must face
Is what type of risk to embrace
Are we in a movie
Where things turn out groovy?
Or are stocks about to retrace?

The risk narrative is having a harder time these days as previous rules of engagement seem to have changed. For instance, historically, when risk was ‘off’, stock prices fell, government bond markets rallied, although credit spreads would widen, the dollar and the yen, and to an extent the Swiss franc, would all out perform the rest of the currency world and gold would outperform the rest of the commodity complex. Risk on would see the opposite movement in all these markets. Trading any product successfully mostly required one to understand the narrative and then respond mechanically. Those were the days!

Lately, the risk narrative has been in flux, as a combination of massive central bank interference across most markets and evolving views on the nature of the global geopolitical framework have called into question many of the previous market assumptions.

The adjustments have been greatest within the bond markets as global debt issuance has exploded higher ever since the GFC in 2009, taking an even sharper turn up in the wake of Covid-19. Of course, central banks have been so heavily involved in the market via QE purchases that it is no longer clear what the bond market is describing. Classical economics explained that countries that issued excessive debt ultimately saw their interest rates rise and their currencies devalue amidst an inflationary spike. However, it seems that theory must be discarded because the empirical evidence has shown that massive government debt issuance has resulted in low inflation and relative currency stability for most nations.

The MMT crowd will explain this is the natural response and should be expected because government spending is an unalloyed good that can be expanded indefinitely with nary a consequence. Meanwhile, the Austrians are hyperventilating over the idea that the ongoing expansion of both government spending and debt issuance will result in a debt deflation and anemic growth for as long as that debt remains a weight on the economy.

These days, the distortion in the bond markets has rendered them unrecognizable to investors with any longevity. Central banks are actively buying not only their own government debt, but corporate debt (IG and junk) and municipal debt. Thus, credit spreads have been compressed to record low levels despite the fact that the current economic situation is one of a cataclysmic collapse in activity. Bankruptcies are growing, but debt continues to be sought by investors worldwide. At some point, this final dichotomy will reconcile itself, but for now, central banks rule the roost.

Equity markets have taken a slightly different tack; when things are positive, buy the FANGMAT group of stocks before anything else, although other purchases are allowed. But when it is time to be concerned because the economic story is in question, simply buy FANGMAT and don’t touch any other stocks. If you remove those seven stocks from the indices, the result is that the S&P and NASDAQ have done virtually nothing since the crash in March, and US markets have actually underperformed their European brethren. Of course, those stocks are in the indices, so cannot be ignored, but the question that must be asked is, based on their current valuation of >$6.8 trillion, are they really worth more than the GDP of Germany and the UK combined? While yesterday saw a modest sell-off in the US, which has continued overnight (Hang Seng -2.2%, Shanghai -3.9%, DAX -1.5%, CAC -1.3%) the fact remains stock markets continue to price in a V-shaped recovery and nothing less. And since stock markets tend to drive the overall narrative, if that story changes, beware the movement elsewhere.

It should be noted that yesterday’s Initial Claims data, printing at 1.41M, the first rise in the data point since March, bodes ill for the idea that growth is going to quickly return to pre-Covid levels. And given the uncertainty over how long that recovery will take, stocks may soon be telling us a different story. Just stay alert.

While idioms tell us what’s bold
Is brass, we must all now behold
The barbarous relic
Whose rise seems angelic
Of course, I’m referring to gold!

Turning to precious metals as risk indicators, price action in both gold and silver indicates a great deal of underlying concern in the current market framework. Gold, as you cannot have missed, is fast approaching $1900/oz and its record high level of $1921 is in sight. Silver, while still well below its all-time highs of $49.80/oz, has rallied more than 24% in July, and is gaining more and more adherents. The key unknown is whether this is due to an impending fear of economic calamity, or simply the fact that real interest rates have turned negative throughout the G10 nations and so the cost of owning gold is de minimis.

For the conspiracy theorists, the concern is that ongoing central bank money printing is going to ultimately debase the value of all currencies, so while they may remain relatively stable in the FX markets, their value in purchasing real goods will greatly diminish. In other words, inflation, that the central banks so fervently desire, will reveal itself as a much greater threat than currently imagined by most. Here, too, the geopolitics comes into play, as there is growing concern that the current tit-for-tat squabbles between the US and China will escalate into a more dangerous situation, one where shots are fired in anger, at which times gold is seen as the ultimate safe haven. Personally, I do not believe the US-China situation deteriorates into a hot war as while both presidents need to show they are strong and tough against their rivals, thus the rhetoric and diplomatic squabbles, neither can afford a war.

And finally, to the FX market, where the dollar has clearly lost its luster as the ultimate safe haven, a title it held as recently as two month’s ago. While today’s movement is relatively benign across all currencies, what we have seen this month is a dollar declining against the entire G10 bloc and the bulk of the EMG bloc as well, with several currencies (CLP +7.0%, HUF +5.4%, SEK +5.2%) showing impressive gains. If we think back to the narrative heading into the July 4th holiday, it was focused on the upcoming payroll release and the recent FOMC meeting which had everyone buying into the risk-on narrative. That came from the fact that the payroll data was MUCH better than expected and the Fed made clear they were going to stand ready to continue to add liquidity to markets forever, if they deemed it necessary. Back then, the euro was trading just above 1.12, and its future path seemed uncertain to most. But now, here we are just three weeks later, and the euro has been rising steadily despite the fact that concerns continue to grow over the growth narrative.

Is the euro becoming the new haven currency of last resort? That seems a bit premature, although the EU’s recent agreement to issue mutual debt and inaugurate a more fulsome EU-wide fiscal policy will be an important part of that story in the future. But for now, it seems that there is an almost willful blindness on the part of the investor community as they pay lip service to worries about the recovery’s shape but continue to find succor in (previous) risk-on assets.

While the dollar today is mixed with limited movement in any currency, there is no doubt the FX narrative is evolving toward ‘the dollar has much further to fall between the political chaos and the still positive view of the economy’s future. But remember this, while the dollar has traded to its weakest point in about two years, it is far away from any level that could be considered weak. Current momentum is against the dollar, and if the euro were to trade to resistance between 1.17-1.18, it would not be surprising, but already the pace of its decline has been ebbing, so I do not expect a collapse of any sort, rather a further gradual decline seems the best bet for now.

Good luck, good weekend and stay safe


Stocks Dare Not Wane

Can someone, to me, please explain
The reason that stocks dare not wane?
If this is to be
Then how come we see
Both silver and gold, new heights gain?

It seems like the narrative is becoming more difficult to explain these days. On the one hand, risk appetite appears to be gaining as evidenced by the ongoing rally in equity markets, the continued rebound in oil prices and the dollar’s steady decline. The rationale continues to be one where hope springs eternal for the elusive Covid vaccine and that fiscal stimulus will continue to be pumped into the global economy until said vaccine arrives driving a V-shaped recovery. Meanwhile, paying for that fiscal stimulus will be global central banks, who are printing money as quickly as possible in order to mop up all the newly issued bonds. (I would wager that the ECB will purchase at least 50% of the new EU bonds when they are finally issued.)

The potential flaw in this theory is the price behavior of haven assets, notably gold, silver and Treasuries, all of which have continued to rally right alongside risk assets. Now, it is certainly possible that the continuous flood of new money into the global economy has simply resulted in all assets rising in price, including the haven assets, but it would be a mistake to ignore the signals those haven assets are flashing. For instance, 10-year Treasury yields have fallen back below 0.60% today for the first time since establishing their historic low at 0.569% in mid-April. Historically, the message of low 10-year yields has been slow growth ahead. It seems to me that doesn’t jive very well with the V-shaped recovery story that appears to be driving equity prices. Of course, the issue here could easily be that the Fed’s purchases are simply distorting the market thus removing any signaling power from 10-year yields, but they have assured us repeatedly that is not the case. Rather, their purchases are designed to insure the opposite, that the market functions normally.

Turning to precious metals, both gold and silver have been on a tear of late, with silver really turning it on in July, rising 21%, while gold has seen steady buying and is higher by 4.3% so far this month. Granted, this could simply be part of the dollar weakness effect, where a declining dollar lifts the value of all commodities. But you cannot rule out the idea that this price movement is a signal of growing concerns over the value of all fiat currencies as central banks around the world work overtime to provide liquidity to markets.

From the perspective of the narrative, it is important to accept that this time it’s different, and that these haven asset signals are merely noise in the new world order. And maybe they are. Maybe the fact that central banks around the world have added nearly $20 trillion of liquidity to global markets without corresponding economic growth is of no real concern and will not result in consequences like rising inflation or growth in inequality. Unfortunately, the one thing that we have learned during this crisis is that central banks have a single playbook regardless of the situation…print more money. Like a man with a hammer, to whom every problem looks like a nail, central bankers see a problem and respond in one way only… turn on the presses. I certainly hope the Fed et al, know what they are doing, but the evidence is that their models are no longer reflective of reality, and that is the big problem. Any model is only as good as its data, but good data doesn’t make a bad model good, in fact it is more likely to give misinformation instead.

So, let us now turn to the market’s activities this morning to see if there is anything new under the sun. While equity markets around the world are under pressure, the losses are relatively small and arguably just a reflex response to what has been a strong run for the past several sessions. Government bonds continue to rally ever so slowly in both the US and Europe, but the truly interesting things are happening in the FX world.

To start, the euro has well and truly broken out of its range, easily taking out resistance at 1.1495 during its 0.7% climb yesterday. This morning, it has added to those gains, up another 0.4% and trading at levels last seen in October 2018. Momentum is on its side and as I mentioned yesterday, I see no real resistance until at least 1.17, meaning another 1.0%-2.0% is quite within reason. At this stage, there doesn’t need to be a narrative, just the acceptance that the current trend is strong. But yesterday saw the entire G10 space rally, led by AUD (+1.6%) and NOK (+1.3%) with the former benefitting from a serious short squeeze while the latter had oil to thank for its gains. But even the yen (+0.45% yesterday) showed real strength, despite no concern about risk.

But the real story was in the EMG space, where virtually the entire bloc was firmer, although none so impressively as BRL, which rocketed 3.1% during the day. It seems that a combination of general positivity from the EU’s announced deal and the specifics of the introduction of the long-awaited new tax reform by the Bolsonaro administration were enough to get the juices flowing. Technically, it appears that barring any significant negative news, this could continue until USDBRL tests 5.00, or even the 4.85 lows seen in mid-June.

But the entire EMG bloc was on fire, with the CE4 far outperforming the euro (CZK +1.95%, HUF +1.90%, PLN +1.6%) but also strength elsewhere in LATAM (CLP +1.75%, COP +0.75%). In fact, APAC currencies were the laggards, although most of them did rise modestly. This morning’s price action has been a bit more muted, although we have seen IDR (+0.6%) halt what has been an impressive weakening trend. It seems that a local company is planning to move into Covid vaccine trials next month which has encouraged optimists to believe the second wave of infections there may be addressed soon.

Arguably, the one truly interesting thing today is the weakness in CNY (-0.2%) which seems to be a response to the story that the US has closed the Chinese consulate in Houston. The Chinese are now threatening to close the US consulate in Wuhan (who would want to work in that office anyway?) with the real concern that the ongoing cold war between the two nations shows no signs of abating. In fact, if you want a rationale for owning haven assets, this situation offers plenty of scope.

Turning to the data today, we get our first from the US in the form of Existing Home Sales (exp 4.75M) which would represent a 21% gain from last month. Of course, the level remains far below the pre-Covid situation where 5.5M was the norm for more than 5 years. The Fed remains in its quiet period as the market will eventually turn their attention to next Wednesday’s meeting, but for now, the market doesn’t need any further impetus. The story is the dollar is falling and risk is to be acquired. While the latter idea might be a little bit of a concern, the former, a weaker dollar, seems a fait accompli for now.

Good luck and stay safe


It’s Over

“It’s over”, Navarro replied
When asked if the trade deal had died
The stock market’s dump
Forced President Trump
To tweet the deal’s still verified

What we learned last night is that the market is still highly focused on the trade situation between the US and China. Peter Navarro, the Director of Trade and Manufacturing Policy, was interviewed and when asked if, given all the issues that have been ongoing between the two countries, the trade deal was over, he replied, “it’s over, yes.” The market response was swift, with US equity futures plummeting nearly 2% in minutes, with similar price action seen in Tokyo and Sydney, before the president jumped on Twitter to explain that the deal was “fully intact.”

One possible lesson to be gleaned from this story is that the market has clearly moved on from the coronavirus, per se, and instead is now focusing on the ramifications of all the virus has already wrought. The latest forecasts from the OECD show trade volumes are expected to plummet by between 10% and 15% this year, although are expected to rebound sharply in 2021. The key is that infection counts and fatality rates are no longer market drivers. Instead, we are back to economic data points.

Arguably, this is a much better scenario for investors as these variables have been studied far more extensively with their impact on economic activity reasonably well understood. It is with this in mind that I would humbly suggest we have moved into a new phase of the Covid impact on the world; from fear, initially, to panicked government response, and now on to economic fallout. Its not that the economic impact was unimportant before, but it came as an afterthought to the human impact. Now, despite the seeming resurgence in infections in many spots around the world, at least from the global market’s perspective, we are back to trade data and economic stories.

This was also made evident by all the talk regarding today’s preliminary PMI data out of Europe, which showed French numbers above 50 and the Eurozone, as a whole, back to a 47.5 reading on the Composite index. However, this strikes me as a significant misunderstanding of what this data describes. Remember, the PMI question is, are things better, worse or the same as last month? Now, while April was the nadir of depression-like economic activity, last month represented the second worst set of numbers recorded amidst global shutdowns across many industries. It is not a great stretch to believe that this month is better than last. But this does not indicate in any manner that the economy is back to any semblance of normal. After all, if we were back to normal, would we all still be working from home and wearing masks everywhere? So yes, things are better than the worst readings from April and May, but as we will learn when the hard data arrives, the economic situation remains dire worldwide.

But while the economic numbers may be awful, that has not stopped investors traders Robinhooders from taking the bull by the horns and pouring more energy into driving stocks higher still. Of course, they are goaded on by the President, but they seem to have plenty of determination on their own. Here’s an interesting tidbit, the market cap of the three largest companies, Apple, Microsoft and Amazon now represents more than 20% of US GDP! To many, that seems a tad excessive, and will be pointed to, after prices correct, as one of the greatest excesses created in this market.

And today is no different, with the risk bit in their teeth, equity markets are once again trading higher across the board. Once the little trade hiccup had passed, buyers came out of the woodwork and we saw Asia (Nikkei +0.5%, Hang Seng +1.6%, Shanghai +0.2%) and Europe (DAX +2.7%, CAC +1.6%, FTSE 100 +1.2%) all steam higher. US futures are also pointing in that direction, currently up between 0.6% and 0.8%. Treasury yields are edging higher as haven assets continue to lose their allure, with 10-year Treasury yields up another basis point and 2bp rises seen throughout European markets. Interestingly, there is one haven that is performing well today, gold, which is up just 0.15% this morning, but has rallied more than 5% in the past two weeks and is back to levels not seen since 2012.

Of course, the gold explanation is likely to reside in the dollar, which in a more typical risk-on environment like we are currently experiencing, is sliding with gusto. Yesterday’s weakness has continued today with most G10 currencies firmer led by NOK (+0.9%) and SEK (+0.75%) on the back of oil’s ongoing rebound and general optimism about future growth. It should be no surprise that the yen has declined again, but its 0.1% fall is hardly earth shattering. Of more interest is the pound (-0.3%) which after an early surge on the back of the UK PMI data (Mfg 50.1), has given it all back and then some as talk of the UK economy faring worse than either the US or Europe is making the rounds.

In the EMG bloc, the dollar’s weakness is broad-based with MXN and KRW (+0.6% each) leading the way but INR an PLN (+0.5% each) close behind. As can be seen, there is no one geographic area either leading or lagging which is simply indicative of the fact that this is a dollar story, not a currency one.

On the data front in the US, while we also get the PMI data, it has never been seen as quite as important as the ISM data due next week. However, expectations are for a 50.0 reading in the Manufacturing and 48.0 in the Services indices. We also see New Home Sales (exp 640K) which follow yesterday’s disastrous Existing Home Sales data (3.91M, exp 4.09M and the worst print since 2010 right after the GFC.) We hear from another Fed speaker today, James Bullard the dove, but I have to admit that Chairman Powell has everybody on the FOMC singing from the same hymnal, so don’t expect any surprises there.

Instead, today is very clearly risk-on implying that the dollar ought to continue to trade a bit lower. My hypothesis about the dollar leading stocks last week has clearly come a cropper, and we are, instead, back to the way things were. Risk on means a weaker dollar and vice versa.

Good luck and stay safe