Post-Covid Themes

With Thanksgiving now in the past
And Christmas approaching quite fast
The only thing clear
Through end of the year
Is dollar shorts have been amassed

For many, conviction is strong
That currencies, they need be long
The idea, it seems
Is post-Covid themes
Mean risk averse views are now wrong

Having been away for a week, the most interesting thing this morning is the rising conviction in the view that the dollar has much further to decline in 2021.  Much is made of the fact that since its Covid induced highs in March, the dollar has fallen by more than 12% vs the Dollar Index (DXY) which is basically the euro.  Of course, that is nothing compared to the recoveries seen by the commodity currencies like NOK (+33.2%), AUD (+27.6%) and NZD (+23.6%) over the same period.  Yet when viewed on a year-to-date basis, the movement is far less impressive, with NOK actually unchanged on the year, and the leader, SEK, higher by 10.8%.  It is also worth remembering that the euro has rallied by a relatively modest 6.9% thus far in 2020, hardly worthy of the term dollar collapse.

In addition, as I have written before, but given the growing dollar bearish sentiment, I feel worth repeating, is that in the broad scheme of things, the dollar is essentially right in the middle of its long-term trading range.  For instance, from the day the euro came into existence, January 1, 1999, the average daily FX rate, according to Bloomberg, has been 1.1999, almost exactly where it currently trades.  It has ranged from a low of 0.8230 in October 2000 to a high of 1.6038 the summer before the GFC hit.  The point is EURUSD at 1.20 is hardly unusual, neither can it be considered weak nor strong.

Unpacking the rationale, as best I understand it, for the dollar’s imminent decline, we see that a great deal of faith is put upon the idea of a continuing risk rally over the next months as the global economy recovers with the advent of the Covid vaccines that seem likely to be approved within weeks.  The sequence of events in mind is that the distribution of the vaccine will have the dual impact of dramatically reducing the Covid caseloads while simultaneously reinvigorating confidence in the population to resume pre-Covid activities like going out to restaurants, bars and the movies, as well as resuming their travel plans.  The ensuing burst of activity will result in a return to pre-Covid levels of economic activity and all will be right with the world.  (PS  pre-Covid economic activity was a desultory 1.5% GDP growth with low inflation that caused the central bank community to maintain ultra-low interest rates for a decade!)

Equity markets, which are seemingly already priced for this utopian existence, will continue to rally based on the never-ending stream of central bank liquidity…or is it based on the massive growth in earnings given the near certainty of higher taxes and higher interest rates in the future.  No, it can’t be the second view, as higher taxes and higher interest rates are traditionally equity negatives.  So perhaps, equity markets will continue to rally as the prospect of future growth will remain just close enough to seem real, but far enough away to discourage policymakers from changing the rules now.  Perhaps this is what is meant by the Goldilocks recovery.

Of course, while commodity markets have bought into the story hook, line and sinker, it must be recalled that they have been the greatest underperforming segment of markets for the past decade.  Since December 1, 2010, the Goldman Sachs Commodity Index (GSCI) has fallen 36.5%, while the S&P500 has rallied 191%.  My point is the fact that commodity markets are performing well with the prospects of incipient economic growth ought not be that surprising.

The fly in the ointment, however, is the bond market, where despite all the ink spilled regarding the reflation trade and the steepening of the US Treasury yield curve, 10-year Treasuries refuse to confirm the glowing views of the future. At least, while they may be agnostic on growth, there is certainly little concern over a rekindling of inflation, despite the earnest promises of every central banker in the world to stoke the fires and bring measured inflation back to their targets.  As I type this morning, 10-year Treasury yields are 0.85%, right in the middle of its range since the US election.  You remember that, the event that was to usher in the great reflation?

In the end, while sentiment has clearly been growing toward a stronger recovery next year, encouraging risk appetites in both G10 and, especially, EMG economies, as yet, the data has not matched expectations, and positioning remains based on hope rather than evidence.

Now a quick tour around today’s markets shows that the equity rally has paused, at the very least, with weakness in Asia (Nikkei -0.8%, Hang Seng -2.1%, Shanghai -0.5%) despite stronger than expected economic data from both Japan (IP +3.8%) and China (Mfg PMI 52.1, non-Mfg PMI 56.4).  European markets are also mostly in the red, although the DAX (+0.2%) is the exception to the rule.  However, the CAC (-0.4%) and FTSE 100 (-0.15%) have joined the rest of the continent lower despite positive comments regarding a Brexit deal being within reach this week.  US futures have a bit of gloom about themselves as well, with both DOW and SPX futures pointing to 0.5% declines at the open, although NASDAQ futures are little changed at this hour.

Surprisingly, despite the soft tone in the equity markets, European government bond yields are all edging higher, with Bunds (+1.6bps) pretty much defining the day’s activity as most other major markets are seeing similar moves, including Treasuries (+1.8 bps).  Commodity prices are under pressure with oil (-1.3%) and gold (-0.9%) both suffering although Bitcoin seems to be regaining its footing, rallying 2.3% this morning.

Finally, the dollar, is under a modicum of pressure this morning with G10 currencies mostly a bit firmer (NOK and SEK +0.4%) GBP (+0.3%), although AUD (-0.1%) seems to be getting nosebleeds as it approaches its highest level in two years.  Potentially, word that China has slapped more tariffs on Australian wines, as the acrimony between those two nations escalates, could be removing the rose-colored tint there.  Meanwhile, in the EMG bloc, there is a mix of activity, with some gainers (HUF +0.8%) and BRL (+0.65%), and some losers (ZAR -0.3%), KRW (-0.25%).  Broadly, the commodity focused currencies here are feeling a little pressure from the underperformance in oil and metals, while the CE4 are tracking the euro nicely.

It is an important data week, and we also hear from numerous central bankers.

Today Chicago PMI 59.0
Tuesday ISM Manufacturing 58.0
Construction Spending 0.8%
Wednesday ADP Employment 420K
Fed Beige Book
Thursday Initial Claims 765K
Continuing Claims 5.81M
ISM Services 57.6
Friday Nonfarm Payrolls 500K
Private Payrolls 608K
Manufacturing Payrolls 46K
Unemployment Rate 6.8%
Average Hourly Earnings 0.1% (4.2% Y/Y)
Average Weekly Hours 34.8
Trade Balance -$64.8B
Factory Orders 0.8%

Source: Bloomberg

In addition, we have seven Fed speakers this week, including most importantly, Chairman Powell’s testimony to the Senate Banking Committee tomorrow and the House Finance Panel on Wednesday.  We also hear from Madame Lagarde twice this week, and with the euro hovering just below 1.20, be prepared for her to mention that a too-strong euro is counterproductive.  You may recall in early September, the last time the euro was at these levels, that both she and Philip Lane, ECB Chief Economist, were quickly on the tape talking down the single currency.  Although since that time CNY has rallied strongly (+4%) thus removing some of the pressure on the ECB, there is still no way they want to see the euro rally sharply from here.

But do not be surprised to see the market test those euro highs today or tomorrow, if only to see the ECB response and pain threshold.  Clearly, momentum is against the greenback lately, and today is no exception, but I do not buy the dramatic decline story, if only because no other central bank will sit idly by and allow it.

Good luck and stay safe
Adf

Appalled

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

More Money They’ll Print

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

Growth’s Pace Declining

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

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

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

Now, back to our regularly scheduled programming.

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

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

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

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

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

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

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

Good luck, good weekend and stay safe
Adf

There is Trouble

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

Giddy and Squiffed

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

Quickly Fading

With stimulus hopes quickly fading
And Covid, more countries pervading
Most risk appetites
Have been read last rites
Thus traders, to buy, need persuading

Well, yesterday was no fun, at least if you owned equities in your portfolio, as we saw sharp declines throughout European and US markets.  And frankly, today is not shaping up to be much better.  Risk assets are still being jettisoned around the world as investors run to havens.  Perhaps the only place this is not true is China, where recent data releases show the economy there moving back toward trend growth.  The question at hand, then, seems to be, Is this the beginning of the widely anticipated sell-off/correction?  Or is this simply a short-term blip in an otherwise strong uptrend in risk asset pricing?

Evidence on the side of the broader sell-off comes in the form of; a) the lack of a stimulus bill, which seems officially impossible before the election, and to which may hopes were pinned; and b) the increasing spread of Covid-19, forcing governments worldwide to reimpose restrictions on dining, drinking and many in-person services.  Without the stimulus to offset the economic activity that is being halted, the prospects of economic growth are fading quickly.  And unless the Fed or ECB starts to give money directly to citizens, rather than simply purchase securities, there is very little either one can do to prevent a more serious economic downturn.

Worryingly, the evidence for the short-term blip thesis is entirely technical, as yesterday’s price action halted at a key trend line, thus did not ‘officially’ break lower.  Certainly, it is exceedingly difficult to find a good reason to believe that, after a remarkable runup since the March lows, there is much left in the tank of this rally.  On what basis does one become bullish from here?  After all, the hopes for stimulus have been dashed, at least in the near-term.  Hopes for a vaccine have taken a back seat as well, with much less discussion as numerous candidates continue to go through phase 2 and 3 trials, but nothing has been approved.  The problem with the hopes for a vaccine being approved quickly is that a key part of the approval process is to ensure that there are no long-term side effects for those that prove efficacious.  And that simply takes time and cannot be accelerated.

Meanwhile, as the US election nears, investors appear to be taking their cues from the polls and expectations for a Biden victory are growing.  It is interesting to me that given the Democratic platform of higher taxes, more government intrusion into the economy and an attack on the mega-cap tech companies with an eye toward breaking them up, that investors believe a Blue wave will be positive for equities.  It seems to me, all of those would be decidedly negative outcomes for shareholders as we would transition from one of the most openly business-friendly presidencies to what, on the surface, would shape up as one of the least business-friendly administrations.  Yet, nearly everything that has been published, or at least that I have seen, comes down on the side of a Biden victory as being positive for risk assets.  While this appears to be entirely on the strength of expectations for a massive new stimulus bill, for an institution that prides itself on its forward-looking abilities, one would think the negatives of even larger increases in the budget deficit and the public debt required to fund those, would be recognized as distinctly negative.

But for now, the narrative remains if the polls are correct, risk assets will perform well, the yield curve will steepen, and the dollar will decline.  While I would argue the first two are unlikely, the dollar’s behavior will depend on what happens elsewhere in the world, thus seems impossible to call at this time.

And that seems to be the state of play this morning.  So, let’s take a look around markets at this hour.  Overnight equity action saw a mixed bag with the Nikkei essentially unchanged, the Hang Seng (-0.5%) softening and Shanghai (+0.1%) marginally higher.  As an aside, Australia’s ASX 200 fell 1.7%, despite the relatively positive news about China.  In Europe, while the FTSE 100 is back to flat on the session, the Continent remains under water led by the CAC (-1.0%) but with solid declines elsewhere (DAX -0.4%, Italy’s MIB -0.55%).  These readings, though, are actually better than from earlier in the session.  Finally, US futures have also improved in the past hour and are now pointing higher by roughly 0.5%.

Bond markets are showing modest risk-off tendencies this morning, at least throughout Europe, with Bund yields lower by 1bp, as are French OAT’s.  Treasuries, on the other hand are unchanged in the session, trading right at 0.80%, which represents about a 7-basis point decline (bond rally) from last week’s levels.  There remains a huge amount of sentiment that the yield curve is going to steepen dramatically after the election as traders and investors anticipate a tsunami of bond issuance to fund the new Administration’s platform.  Of course, if the polls prove to be wrong, as they were in 2016, my sense is we could see a very sharp bond rally as the record short interest in bond futures gets quickly unwound.

Commodity prices, which yesterday were under pressure, and have seen oil trade well back below the $40/bbl level, are bouncing this morning, up ~1.0%, but looking through the rest of the complex, in base metals and ags, movement has been very modest and is mixed.

Finally, the dollar has turned from a dull opening, to some modest weakness overall.  NOK (+0.65%) is leading the way higher in the G10 space as it benefits from oil’s bounce.  However, after that, CAD (+0.3%) is the next biggest mover, also being helped by oil, and the rest of the bloc is +/- 0.2%, with no real stories to tell.  The pound, which has really done very little this month, continues to be whipsawed by Brexit headlines, although there is some positivity as both sides are meeting right now in London.

Emerging market currencies have two outliers this morning, ZAR (+0.75%) and TRY (-0.8%), with the rest of the bloc +/- 0.2% and very little of news to discuss.  If I had to characterize the market, it would be slightly dollar bearish, but in truth, the modesty of movement makes any judgement hard to offer.  As to the big movers, Turkey’s lira continues to suffer (-3.5% this week) as investors flee the country amid concerns the central bank has completely lost control of markets there, while President Erdogan continues his war of words with Europe and feels the sting of further sanctions.  On the flipside, ZAR is actually the leading gainer in the past week, as well as today, with hopes for positive budget news bolstering the demand for very high real yields.

Data today brings Durable Goods (exp 0.5%, 0.4% ex transport), Case Shiller Home Prices (4.20%) and Consumer Confidence (102.0).  With the Fed meeting next week, we have entered into the quiet period, so will not be hearing them castigate Congress for failing to pass a spending bill, although they all will be thinking it!  Across the pond, the ECB meets Thursday, and analysts are anticipating a strong signal that the ECB is going to increase monetary ease in December, yet another reason to be suspect of the collapsing dollar theory.  As for today, if the bulls can get the upper hand, then the dollar’s modest retreat thus far today can certainly extend.  But I don’t really see that happening, and think we see a bit of dollar strength before the session ends.

Good luck and stay safe
Adf

Quickly Diminished

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

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

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

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

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

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

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

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

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

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

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

Source: Bloomberg

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

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

Good luck and stay safe
Adf

Concerns Within Europe

Concerns within Europe have grown
As surveys this morning have shown
Small businesses think
That many will sink
If Covid is not overthrown

The world seems a bit gloomier this morning as negative stories are gaining a foothold in investors’ minds.  Aside from the ongoing election and stimulus dramas in the US, and the ongoing Brexit drama in the UK/EU, concern was raised after a report was released by McKinsey this morning with results of a survey of SME’s in Germany, France, Italy, Spain and the UK.  Those results were not promising at all, as more than half of the 2200 companies surveyed in August expected to file for bankruptcy in the next year if revenues don’t increase.  More than 80% of those companies described the economy as weak or very weak.  If this survey is representative of SME’s throughout Europe, this is a very big deal.  SME’s (defined here as companies with less than 250 employees) employ over 90 million people in the EU.  Losing a large portion of those companies would be a devastating blow to the EU economy.  In fact, the IMF, which in its past had been the high priest of austerity for troubled nations, is now urging European (really all) countries to continue to spend any amount necessary to prevent businesses from collapsing.

This report serves as a fresh reminder of the remarkable contrast between market behavior and economic activity worldwide.  Not only is the current business situation tenuous, but prospects for the immediate future remain terrible as well.  And yet, equity markets worldwide have been able to look past the current economic devastation and rally on expectations of; 1) a blue wave in the US which will prompt massive stimulus spending; and 2) the quick and successful completion of Covid vaccine trials which will restore confidence in people’s everyday activities.  After all, if you were no longer concerned about getting infected with a deadly disease by a stranger, going to a movie, or taking a train or any one of a thousand different normal behaviors could be resumed, and the economy would truly start to rebound in earnest.

The question, of course, is how realistic are these assumptions underlying the market behavior?  Anecdotally, I have seen too many things to disrupt the idea of a blue wave and would question the accuracy of many of the polls.  Again, in 2016, Hillary Clinton was given a 98.4% probability of winning the election the day before voting, and we know how that worked out.  My point is, this race is likely significantly tighter than many polls reflect, yet markets do not seem to be taking that into account.  Secondly, vaccines typically take between four and five years to be created and approved, so expecting that a safe and effective vaccine will be widely available in a twelve-month timeline seems quite the stretch as well.  I understand technology has improved dramatically, but this timeline is extremely aggressive.  And this doesn’t even answer the question of how many people will take the vaccine, if it becomes available.  Remember, the flu vaccine, which is widely available, generally safe and constantly advertised, is only taken by 43% of the population.

The bigger point is that the market narrative has been very clear but could well be based on fallacious assumptions.  And looking at market behavior yesterday and today, it seems as though some of those assumptions are finally being questioned.

For instance, equity markets, after falling in the US afternoon on the back of worries that the Pelosi/Mnuchin stimulus talks are stalling, fell in Asia (Nikkei -0.7%, Shanghai -0.4%) ) although early losses in Europe have since been pared back to essentially flat performance.  US futures are pointing slightly lower, but only on the order of 0.1%-0.2%.  Aside from the negative tone of the McKinsey survey discussed above, GfK Consumer Confidence in Germany fell to -3.1, a bit worse than expected, and French Business Confidence indices all turned out lower than expected.  Again, evidence of a strong recovery in Europe remains hidden.

Bond markets remain disconnected from the equity sphere, at least from traditional correlations when discussing risk appetite.  While today has more characteristics of a risk-off session, and in fairness, 10-year Treasury yields have fallen 1 basis point, European government bond markets are selling off, with yields rising across the board.  Once again, the PIGS lead the way as Greece has seen its 10-year yield rise 20bps in the past week.  For a little perspective on 10-year yields, which have become a very hot topic as they traded through 0.80% two days ago, looking at a 5-year chart, the range has been 3.237%, in November 2018, to 0.507% this past August.  It is hard to get overly excited that yields are rising rapidly given the virtual flat line that describes the trend of the post Covid activity world.

Finally, the dollar, which has been under pressure this week overall, is seeing a little love this morning, having rallied modestly against most of the G10 as well as the EMG bloc.  Starting with emerging markets, the CE4 have been key underperformers with PLN (-0.4%), HUF (-0.4%) and CZK (-0.3%) following the euro lower.  Remember, these currencies tend to track the single currency quite closely, if with a bit more beta.  CNY (-0.4%) has also come under pressure, but given its performance over the past five months, this blip appears mostly as profit taking.  The only EMG currency in the green today is ZAR (+0.2%) which is most likely driven by ongoing interest in South African bond yields.

In the G10, SEK (-0.4%) is the laggard, although both GBP (0.3%) and EUR (-0.3%) are not far behind.  Swedish krona price action looks to be purely position related, as it has been among the best performers in the past week, so a little profit-taking seems in order.  As to the euro, we have already discussed the weak data and survey results.  And finally, the pound remains beholden to the Brexit negotiations, which while heavily hyped yesterday, seem to have found a few more doubters this morning, with a positive outcome not nearly so clear.

On the data front, this morning brings weekly Initial Claims (exp 870K) and Continuing Claims (9.625M) as well as Leading Indicators (0.6%) and Existing Home Sales (6.30M).  Last week’s Initial Claims data was disappointingly high, so this week’s results should get extra scrutiny with respect to the pace of any economic recovery.  As to the Home Sales data, Starts and Permits earlier in the week were solid, and record low mortgage rates, thanks to the Fed’s QE, continue to support housing, as does the flight to the suburbs from so many major urban areas.

From the Fed, it can be no surprise that uber-dove Lael Brainerd virtually demanded more federal stimulus in her comments yesterday, but that has been the theme from the Chairman on down.  Today we hear from three speakers, and it is almost certain that all three will maintain the new Fed mantra of, we will do what we can, but stimulus is necessary.

And that’s really it for the day.  If I had to guess, I expect there to be some positive stimulus headlines, although I doubt a deal will actually be reached.  But all the market needs is headlines, at least that’s all the algos need, so look for the dollar to give up its early gains on some type of positive news like that.

Good luck and stay safe
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Covid Comebacking

Investors are lately concerned
That risk is what needs to be spurned
With stimulus lacking
And Covid comebacking
The bulls are afraid they’ll get burned

Risk is starting to get a bad name for itself lately as we are heading into our third consecutive day of equity market selling and haven asset buying.  The twin stories of the resurgence in coronavirus cases throughout the world and the terminal diagnosis for additional US fiscal stimulus has many people rethinking the bullish case.  Perhaps the recovery won’t be V-shaped after all.

On the Covid front, as an example of new measures taken, the French government has set a 9:00pm – 6:00am curfew in Paris while the UK is imposing a ban on families from one household mixing with those from another as both nations try to cope with the increase in Covid cases.  (Yesterday, both countries reported 20,000 or more new cases).  And it’s not just those two nations, but the increase in numbers throughout the world is substantial.  India (68K), the US (60K), Brazil (27K) and Russia (14K) are all seeing higher reported infections with most of the rest of Europe also seeing increase in the 5K-10K region.  The data is certainly beginning to look like we are in the midst of a second wave of the disease.  Of course, the one truly noteworthy exception is Sweden, which never went through the lockdown phase, and has not reported any new cases in weeks.

Nonetheless, the fact that the virus is on the march again means that less economic activity will be taking place going forward, and that bodes ill for investors.  Adding to the Covid concerns are the recent announcements by several pharma companies that they are halting trials of their Covid vaccines as recipients got sick from various things. Overall, the Covid story is starting to weigh on investors’ (as well as politicians’) minds and that is undermining some of the previous bullishness on risk assets.

As to fresh fiscal stimulus from the US, it ain’t happening, at least not before the election.  Despite (because of?) all the rhetoric we continue to receive from the central banking and supranational communities about how crucial it is for more US stimulus aid to be injected into the economy, the politics at this point are quite clear.  Neither the Democrats nor the Republicans want to allow the other side to have a victory ahead of the election for fear it might help the other side in the election.  This is why the bills proposed by both the House and the Senate were so far apart; they were simply pandering to their respective political bases.  At the same time, the central bankers have essentially admitted that they have done all they can, and any further action on their part will help only at the very margins of the economy.  Although, further central bank stimulus would likely find its way into equity markets, it wouldn’t help Main Street in any way.

With these as the evolving narratives, it should be no surprise that risk is being shed.  It should also be no surprise that these losses are starting to gain some momentum.  For instance, European equities, as measured by the Eurostoxx 600, fell 0.6% on Tuesday, 0.25% yesterday, but are down a hefty 2.65% today.  And that pattern has been repeated across equity markets around the world.  In fact, Europe bourses today are all lower by between 2.0% and 3.0%.  US futures are also pointing to the same phenomenon, after seeing declines of between 0.6% and 0.8% yesterday, they are currently trading at levels between -1.0% (Dow) and -1.5% (NASDAQ).

Bond markets, which many believe have far better predictive capacity than equity markets with respect to the economy, are in a complete risk-off stance.  10-year Treasury yields, which just Friday appeared to be heading above 0.80%, are back down to 0.70%, having fallen 2.5 basis points overnight.  But it is even clearer in the European markets where the PIGS have each seen their bonds sold today with yields rising between 1 and 4 basis points, while Bunds (-3.8bps), Oats (-2.5bps) and Gilts (-4.1bps) are all seeing significant haven demand.  As I have written before, the reality is that government bonds issued by the PIGS are risk assets, not havens.  After all, do you think any of those four nations will ever be able to repay their debt?

Turning to the dollar, in true risk off fashion, it is the leading light in the currency market today.  In the G10 space, the best performers are CHF and JPY, both of which are essentially unchanged, while we are seeing NOK (-1.1%), AUD (-1.1%) and NZD (-0.75%) lead the way lower.  You will not be surprised to know that oil prices are lower this morning, with WTI and Brent both down by 1.6%, hence NOK’s troubles.  Too, other commodity prices, including the precious metals, are lower, which is clearly undermining the latter two.

One of the interesting things is the recent behavior of Aussie.  Historically, AUD has been almost a proxy on the Chinese economy, given the strong reliance on China for Australia’s economic growth.  Essentially, all the commodities Australia produced were ship north to the mainland.  But lately, there is a great deal of tension between the two nations as the Australians have called out the Chinese on issues like human rights and Hong Kong, and the Chinese have responded by imposing quotas on Australian goods and preventing state-owned companies from purchasing there.  Thus, despite the more positive economic data from China (last night saw CPI rise a less than expected 1.7% and expectations for Monday’s Q3 GDP data have risen to 5.5%), AUD has not been able to benefit. Adding to the Aussie’s woes were comments from the RBA regarding extending the tenor of QE purchases to the 10-year bucket and driving rates lower there.  Naturally, the market did the RBA’s work for it, and yields there fell 7.5 basis points.

Meanwhile, the euro and pound are both under pressure as well, just not as much, as investors continue to reduce exposures to both areas.

As to the EMG bloc, in a bit of a surprise, PLN (-1.1%) is the worst performer of the day, which seems to be on the back of a story about no additional Covid fiscal stimulus (and you thought that was a uniquely US phenomenon).  But ZAR (-1.0%) and MXN (-0.7%) are next in line, with both obviously feeling the pain of weaker commodity prices as well as increases in their Covid case count.  The rest of the bloc is also under pressure, just not quite to the same extent.  And as long as fear reigns, it will be difficult for these currencies to regain a bid.

On the data front, this morning brings Initial Claims (exp 825K), Continuing Claims (10.55M), Empire Manufacturing (14.0) and Philly Fed (14.8).  The Initial Claims data, while obviously well off the worst (highest) levels, has really started to plateau at much higher levels than the economy has ever seen before, which suggests that any rebound remains uneven and modest at best.  But while economic activity is clearly under pressure in the US, and we will see that spelled out in Q3 earnings data which has just started coming in, investor risk appetites, or lack thereof, will be the key driver for now, and that points to further gains in the dollar.  Maybe not huge, but that is the direction most likely.

Good luck and stay safe
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