Tag Archives: #riskon

Most Pundits Agree

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No matter what skeptics might say
The Old Lady didn’t delay
They boosted QE
So, Sunak, Rishi
Can spend more each night and each day

But here, when the FOMC
Meets later, most pundits agree
They will not arrange
A policy change
Instead, for more fiscal they’ll plea

As markets are wont to do, they have effectively moved beyond the uncertainty of the US election outcome to the next big thing, in this case central bank activity.  You may recall that on Tuesday morning we learned the RBA cut interest rates again, down to 0.10% and installed a QE program of A$100 billion.  And while these days, A$100 billion may not seem like much, it does represent more than 5% of the Australian economy.  Of course, that action was mostly lost in the election fever that gripped markets at that time.  However, that fever has broken, and the market has come to terms with the fact there is no blue wave.  This has forced participants to collectively create a new narrative which seems to go as follows: gridlock in the US is good for markets because the Fed will be required to do even more, and thus monetary policy will remain easy for an even longer time.  This, as well as the expected lack of a massive stimulus package, is the driver behind the Treasury rally, which is continuing this morning as 10-year yields have fallen a further 3 basis points (30-year yields have fallen even more as the curve continues to flatten.)

Helping along the new narrative, and right on cue, the Bank of England stepped in and increased their QE program by a more than expected £150 billion this morning, allowing Chancellor of the Exchequer, Rishi Sunak, the leeway to expand fiscal support for the economy as the government there imposes a month long lockdown to try to arrest the spread of Covid-19.  Thus, in the UK, the monetary and fiscal policies are aligned in their efforts to prevent an economic collapse while fighting the effects of Covid.  Naturally, markets have voted in favor of further central bank largesse, and as expectations grow for even more support to come, equity investors are buying as quickly as they can.

Which leads us to the FOMC meeting today.  Cagily, they arranged for this meeting to be two days after the election, as they clearly don’t want to become the big story.  Rather, I’m certain that despite each members’ penchant to speak constantly, this is one time they will be as quiet as possible.  Part of this is due to the fact that there is exactly zero expectation that there will be any change in policy.  Rates are already at the effective lower bound, and thus far the Fed has not been willing to countenance the idea of negative rates.  Not only that, their forward guidance has been clear that rates will not be ‘normalized’ until at least 2023, and then, only if it makes sense to do so.  As to QE, they are already engaged in an unbounded program, purchasing $80 billion of Treasuries and $40 billion of Mortgage-backed securities each month.  Certainly, they could increase those numbers, but given the US Treasury has just significantly revised their expected issuance lower, (given the lack of a stimulus bill to fund), the Fed is already scooping up a huge percentage of the paper that exists.  With all that in place, what more can they do?  After all, if they say they won’t raise rates until 2024, will that actually matter?  I think not.  Instead, the one thing on which we can count is that the Statement, and Chairman Powell in the press conference, will repeat the point that more fiscal stimulus is what is needed.

The upshot is that, the most important par of the election outcome, is with regards to the Senate, which while it seems clear the Republicans have held their majority, could possibly turn blue.  But unless that happens, at this stage, the market has clearly turned its attention beyond the election and is voting favorably for more central bank support.  So, let’s see how things are behaving this morning.

After a strong US rally yesterday, especially in the NASDAQ, Asia took the baton and sprinted ahead as well with the Nikkei (+1.7%), Hang Seng (+3.25%) and Shanghai (+1.3%) all having strong sessions.  In fact, as I look through every APAC market, only Vietnam and Laos had negative days, otherwise every Asian nation rallied across every one of their indices.  Europe is no different, with every market in the green (DAX +1.7%, CAC +1.25%, FTSE 100 +0.5%, as well as all the sundry others), and US futures (DOW +1.4%, SPX +1.9%, NASDAQ +2.6%) are pointing to another big day here.

Bonds, as mentioned above, are also still feeling the love as only the UK appears to be adding to the fiscal mix and so central bank support will continue to drive activity until that changes.  This means that while Bunds, OATS and Gilts are all only marginally changed, the PIGS are seeing substantial demand with yields falling 3 basis points for all of them

Gold is doing well, up $15/oz on what seems to be the idea that fiat currencies will continuously be devalued and so something else will serve as a better store of value.  (Bitcoin, by the way, is also rallying sharply, +5% this morning, as many continue to see it as an alternative to gold.)  Oil, on the other hand, is a bit lower this morning, -1.0%, although that is after having rallied nearly 16% so far this week, so a modest correction doesn’t seem out of order.

Finally, the big loser today has been the dollar, which is weaker vs. essentially every other currency.  In the G10, NOK (+1.1%) is the leader, despite the fact that oil is correcting.  More interestingly, EUR (+0.7%) is rallying despite the fact that there is no expectation for Fed activity, and the relative stances of the Fed and ECB remains unchanged.  Now if there is not going to be a blue wave, and therefore no massive fiscal expansion in the US, I’m at a loss as to why the dollar should be sold.  Today, however, selling dollars is the story.

The same is true in the EMG bloc, with RUB (+2.2%) the runaway leader, but 1% or greater gains seen throughout EMEA and LATAM currencies.  Even IDR (+1.3%) which last night posted worse than expected GDP growth, has seen strength.  As long as the narrative continues to be that election uncertainty is a dollar negative, it appears the dollar has further to fall.  That said, I see no cause for a collapse of any type.

Aside from the FOMC today, we see some data as follows: Initial Claims (exp 735K), Continuing Claims (7.2M), Nonfarm Productivity (5.6%) and Unit Labor Costs (-11.0%).  Yesterday, amidst the election discussion, we missed the fact that ADP Employment rose a much less than expected 365K, and the ISM Services number printed at a worse than expected 56.6.  Perhaps, belatedly, that negative news has been impacting the dollar.  But my sense is this is narrative driven and unless the Fed truly shocks one and all, I expect the dollar can drift lower still for the rest of the session.

Good luck and stay safe
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Votes in the States

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The second wave’s not the infection
Nor, either, is it the election
Instead, central banks
Will fire more blanks
As each makes a massive injection

But meantime, the world now awaits
The outcome from votes in the States
Most polls point toward Blue
Which many construe
As time to add risk to their plates

Election day has finally arrived, and the market is positively giddy over the prospects, or at least so it seems.  Equity markets worldwide are rising dramatically, haven assets are selling off, so Treasuries and bunds have fallen, and the dollar is under pressure versus every currency except the Turkish lira.  Most polls continue to point to a Biden victory, although there are several, interestsingly those that predicted Trump’s victory four years ago, calling for him to be reelected.  It is interesting that risk is being acquired so aggressively at this time given a key part of the narrative has been the relatively high probability of a contested election with no winner declared for weeks, if not longer driving major uncertainty in markets.  In addition, several big cities have been taking precautions against anticipated violence and rioting, with storefronts being boarded up and additional police called to duty.  Again, that hardly seems like a signal to be adding risk, but then this is the 2020’s, when everything you thought you knew turns out to have been wrong.

I guess the real question is, can the risk rally be sustained?  Well, if central banks have anything to say on the subject, and clearly they will try, the answer is a qualified yes.  Qualified because the longevity of the rally is still subject to debate.

While we all know that both the Fed and Bank of England will be meeting on Thursday, last night we got our first central bank meeting of the week, when the RBA convened Down Under.  As was widely expected, they cut their Cash Rate Target to 0.10% and they lowered the yield target on 3-year government bonds to 0.10% (that is their yield curve control program) but they also surprised the market by expanding their QE by A$100 billion.  This last is in addition to their unlimited purchases to maintain the 3-year rate at 0.10%.  The market response was quite positive, but it’s not clear whether that would have happened regardless, or whether it was dependent on the RBA’s actions.  But whatever the case, the ASX 200 rose 1.9% and AUD rose more than a penny and is higher by 0.9% at this hour.

But what of the rest of the world?  Why is risk being gobbled up so aggressively today?  For instance, despite a complete lack of new data from Europe, we are seeing broad-based strength in Continental equity markets.  The DAX (+1.75%), the CAC (+2.0%) and the FTSE 100 (+1.65%) are all firmly in the green, as are every other Eurozone market.  Perhaps they are continuing to react to last week’s ECB meeting where Madame Lagarde promised to “recalibrate” ECB policy in order to do more.  In other words, the creativity of central bankers will be on full display.  Consider, right now, all they can do is print money and buy bonds.  Perhaps they will start to buy other assets (equities anyone?), or perhaps, the frequently discussed digital euro will be announced, with every Eurozone citizen eligible to open an account at the central bank that will be replenished with cash funds regularly.  Or is it simply the European asset management crowd voting that if the polls are correct, the economy will recover quickly?  While there is no obvious catalyst, market sentiment has turned quite positive this week, especially after last week’s doom and gloom.

But it’s not just Europe.  We saw strength in Asia (Nikkei +1.4%, Hang Seng +2.0%, Shanghai +1.4%) and US futures are rocking as well with DOW (+1.5%) leading the way, though both the SPX (+1.2%) and NASDAQ (+0.75%) remain firmly positive.  Again, other than the RBA news, there was nothing out of Asia, and of course it is far too early to have anything from the US.  In fairness, yesterday did see a blowout ISM number 59.3 vs. 56.0 expected, so the data in the US continues to be impressive.  But it beggars belief that equities are rallying today based on that information.  In the end, it remains all about the election.

One thing that we have seen really build up lately is the view that the US yield curve is going to steepen dramatically.  That is evident in the record short position in long bond futures in Chicago (>260K), as well as the massive outflows the from ETF’s TLT and LQD, the biggest government bond and IG corporate bond ETF’s respectively.  The view seems to be that regardless of who wins the election, the US is going to see higher interest rates in the back end as the massive amount of Treasury issuance that will be required to fund the growing budget deficit will overwhelm the market.  And that makes perfect sense.  Of course, making sense and making money are two very different things.  If the market is excessively skewed in one direction in anticipation of an event, it is the very definition of the ‘buy the rumor, sell the news’ set-up that happens time and again.  My take here is that while a year from now, we may well see much higher Treasury yields in the 30-year, that will not be the first move once the election is over.  Not only will the Fed have something to say on the subject, but positions will get stale and unwound, and we could easily see a significant Treasury rally, especially if the economy falters.

One last thing to mention is the oil market, which saw a massive rebound yesterday on the story that the OPEC+ production cuts are likely to remain in place, rather than their expected ending.  In the end, oil prices remain a function of supply and demand, and any economic growth, for now, will still require oil.  The future may well be renewables, but in this case, the future is quite a few years away.

But that is really the story heading into the election.  It is surprising to me that we have seen as much movement as we have this morning, but since election results won’t be released until 7:00pm Eastern time, today is no different than yesterday in terms of new information.  I sincerely doubt that Factory Orders (exp 1.0%) are going to change any views, and given the Fed meeting Thursday, we still have silence from the FOMC.  While I would not fight the tape today, I still do not see the appeal of a short dollar position for the medium term.

Good luck and stay safe
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Remarkable

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The week ahead’s certain to be
Remarkable, as we shall see
Election reports
More Fedspeak, of sorts
And data on jobs finally

There should be no lack of excitement this week as (hopefully) the election season finally winds down and we can all try to begin planning for the next four years of policy.  At this point, most of the polls continue to show there will be a change in the White House, with a fair number of polls predicting a blue wave, where the Democrats retake the Senate, as well as the Presidency.  The thing about pollsters is they are very much like economists; they take the data they want and extrapolate the information in a linear fashion going forward.  The problem with this approach, both for economists and psephologists, is that very little about life or the human condition is linear.  If anything, my observation is that life is quite cyclical, with the key being to determine when the cycle is changing.  As Yogi Berra is reputed to have said, “it’s tough to make predictions, especially about the future.”  But predictions galore are certainly being made these days.

For our purposes, however, it is important to continue to game out the potential outcomes, and for hedgers, ensure that proper hedge protection is in place.  Regarding fiscal policy, it seems quite clear that a blue wave will usher in unprecedented levels of additional fiscal stimulus, with numbers of $3 trillion – $5 trillion being bandied about.  If the status quo remains, with President Trump being reelected and the Senate remaining in Republican control, I expect a much smaller stimulus bill, something on the order of the $1.8 trillion that had been discussed up until last week.  Finally, in the event the Republicans hold the Senate, but Mr Biden wins, we are likely to see the reemergence of fiscal conservatism, at least in a sense, and potentially any bill will be smaller.

With that as our backdrop, the consensus view remains that a Biden victory will see a weakening of the dollar, a steepening of the yield curve and an equity market rally.  Meanwhile a Trump victory will see a strengthening of the dollar, a more modest steepening of the yield curve and an equity market rally.  It is quite interesting to me that the consensus is for stocks to continue to rise regardless of the outcome, and for the long end of the bond market to sell off, with only the degree of movement in question.  I have to ask, why is the dollar story different?  The one conundrum here is the expectation of a weaker dollar and a steeper yield curve.  Historically, steep yield curves, implying strong future growth, lead to a stronger dollar.  And after all, it is not as though, the dollar is at excessively strong levels that could lead one to believe it is overbought.  Regardless, this seems to be what is built in at this stage.

Moving on to the FOMC, Thursday’s meeting, two days after the election, is likely to be the least interesting meeting of the year.  It strains credulity that the Fed will act given what could well be a lack of clarity as to the winner of the election.  And even if it is clear, they really have nothing to do at this time.  They are simply going to reiterate the current stance; rates will not rise before 2023, they will continue to purchase bonds ad infinitum, and please, Congress, enact some more fiscal stimulus!

As to Friday’s employment report, it will depend on whether or not the election is settled as to whether the market views the numbers as important.  If the results are known and it is the status quo, then investors will pay attention to the data.  However, if either there is no clear result, or there is a change at the top, this will all be ancient history as the market will be preparing for the new Administration’s policies, so what happened before will lose its significance.  This is especially so given the expectations for a significantly larger fiscal stimulus outcome, and therefore a significant change in economic expectations.

So, that is how we start things off.  Equity markets have shaken off last week’s poor performance and are rebounding nicely.  Asia started things on the right foot (Nikkei +1.4%, Hang Seng +1.5%) although Shanghai was flat on the day despite a better than expected Manufacturing PMI print (53.6).  Europe, meanwhile, is rocking as well, with the DAX (+1.85%) and CAC (+1.8%) both ripping higher while the FTSE 100 (+1.2%) is also having a solid day.  US futures are all pointing sharply higher as well, around 1.5% as I type.

Bond markets are actually mixed this morning, with Treasuries rallying slightly, and yields lower by 1.5 basis points.  However, in Europe, we are seeing bonds sell off (risk is on, after all) although the movement has been quite modest.  After all, with the ECB promising they will be adding new programs come December, why would anyone want to sell bonds the ECB is going to buy?  Of more interest is the fact that Treasury prices are rallying slightly, but this is likely to do with the fact that the market is heavily short Treasury bond futures, and some lightening of positions ahead of the election could well be in order.

On the commodity front, oil prices are falling further, as the renewed wave of lockdowns in Europe has depressed demand, while Libya simultaneously announced they have increased production to 1 million bbl/day, the last thing the oil market needs.  Gold, meanwhile, is moving higher, which strongly suggests it is behaving as a risk mitigant, given the fact neither rates are falling nor is the dollar.

As to the dollar, arguably, the best description today is mixed.  With so much new information yet to come this week, investors and traders seem to be biding their time.  In the G10, it is an even split, with three currencies modestly firmer, (CAD, NZD and AUD all +0.2%) and three currencies modestly weaker (NOK and GBP -0.2%, CHF -0.1%) with the rest essentially unchanged.  The one that makes the most sense is NOK, with oil continuing its slide.  Surprisingly, the pound is weaker given the story circulating that the EU and UK have essentially reached a compromise on the fisheries issue, one of the key sticking points in Brexit negotiations.

Emerging market currencies have a stronger bias toward weakness with RUB (-1.25%) and TRY (-1.0%) leading the way lower.  Clearly, the former is oil related while the lira has been getting pummeled for weeks as investors continue to vote on their views of Turkish monetary policy and the economic potential given new sanctions from the West.  But after those two, most APAC currencies were under pressure, somewhat surprisingly given the Chinese data, however, INR and TWD (-0.45% each) also underperformed last night.  On the plus side, CZK (+0.35%) is the leader, benefitting from a better than expected PMI print.

Speaking of data, Manufacturing PMI’s from Europe were all revised slightly higher, but had little overall impact on the FX markets.  This week, of course brings a great deal of info:

Today ISM Manufacturing 56.0
ISM Prices Paid 60.5
Construction Spending 1.0%
Tuesday Factory Orders 1.0%
Wednesday ADP Employment 650K
Trade Balance -$63.9B
ISM Services 57.5
Thursday Initial Claims 740K
Continuing Claims 7.35M
Nonfarm Productivity 5.2%
Unit Labor Costs -10.1%
FOMC Rate Decision 0.00% – 0.25%
Friday Nonfarm Payrolls 580K
Private Payrolls 680K
Manufacturing Payrolls 51K
Unemployment Rate 7.6%
Average Hourly Earnings 0.2% (4.6% Y/Y)
Average Weekly Hours 34.7
Participation Rate 61.5%
Consumer Credit $7.5B

Source: Bloomberg

Adding to the mix is the BOE meeting on Thursday as well, while the RBA meets tonight.  To me, this is just trying to level set as we await this week’s extraordinary possibilities.  Nothing has changed my view that the dollar is likely to strengthen as the situation elsewhere in the world, especially in Europe, is pointing to a terrible Q4 outcome economically (and, I fear in the health category) which will continue to weigh on the euro, as well as most emerging markets.  But one thing is clear, is there is a huge amount of uncertainty for the rest of this week.

Good luck and stay safe
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Hope Springs Eternal

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The White House and Congress have talked
‘Bout stimulus but both sides balked
Still, hope springs eternal
That both sides infernal
Intransigence will get unblocked

Throughout 2019, it seemed every other day was a discussion of the trade deal with China, which morphed into the Phase one trade deal, which was, eventually, signed early this year.  But each day, the headlines were the market drivers, with stories about constructive talks leading to stock rallies and risk accumulation, while the periodic breakdowns in talks would result in pretty sharp selloffs.  I’m certain we all remember those days.  I only bring them up because the stimulus talks are the markets’ latest version of those trade talks.  When headlines seem positive that a deal will get done, stock markets rally in the US, and by extension, elsewhere in the world.  But, when there is concern that the stimulus talks will break down, investors head for the exits.  Or at least algorithms head for the exits, its not clear if investors are following yet.

Yesterday was one of those breakdown days, where despite reports of ongoing discussions between Treasury Secretary Mnuchin and House Speaker Pelosi, the vibes were negative with growing concern that no deal would be reached ahead of the election.  Of course, adding to the problem is the fact that Senate Majority Leader McConnell has already said that the numbers being discussed by the House and Congress are far too large to pass the Senate.  Handicapping the probability of a deal being reached is extremely difficult, but I would weigh in on the side of no action.  This seems far more like political posturing ahead of the election than an attempt to address some of the current economic concerns in the country.

Yet, despite yesterday’s negativity, and the ostensible deadline of today imposed by Speaker Pelosi (we all know how little deadlines mean in politics, just ask Boris), this morning has seen a return of hope that a deal will, in fact get done, and that the impact will be a huge boost to the economy, and by extension to the stock market.  So generally, today is a risk-on session, at least so far, with most Asian markets performing nicely and most of Europe in the green, despite rapidly rising infection counts in Europe’s second wave.  Remember, though, when markets become beholden to a political narrative like this, it is extremely difficult to anticipate short-term movements.

Down Under, the RBA said
We’re thinking, while looking ahead
A negative rate
Is still on the plate
So traders, their Aussie, did shed

While the politics is clearly the top story, given the risk-on nature of markets today, and the corresponding general weakness in the dollar, it was necessary to highlight the outliers, in this case, AUD (-0.4%) and NZD (-0.5%), which are clearly ignoring the bigger narrative.  However, there is a solid explanation here.  Last night, between the RBA’s Minutes and comments from Deputy Governor Kent, the market learned that the RBA is now considering negative interest rates.  Previously, the RBA had been clear that the current overnight rate level of 0.25% was the lower bound, and that negative rates did not make sense in Australia (in fairness, they don’t make sense anywhere.)  But given the sluggish state of the recovery from the initial Covid driven recession, the RBA has decided that negative rates may well be just the ticket to goose growth once covid lockdowns are lifted.  It is no surprise that Aussie fell, and traders extended the idea to New Zealand as well, assuming that if Australia goes negative, New Zealand would have no choice but to do so as well.  Hence the decline in both currencies overnight.

But really, those are the only stories of note this morning, in an otherwise dull session.  As I mentioned, risk is ‘on’ but not aggressively so.  While the Nikkei (-0.4%) did slip, we saw modest gains in Shanghai (+0.5%) and Hong Kong (+0.1%).  Europe, too, is somewhat higher, but not excessively so.  Spain’s IBEX (+0.85%) is the leader on the continent, although we are seeing gains in the CAC (+0.4%) and the FTSE 100 (+0.3%) as well.  The DAX (-0.3%), however, is unloved today as Covid cases rise back to early April levels and lockdowns are being considered throughout the country.  Finally, the rose-tinted glasses have been put back on by US equity futures traders with all three indices higher by a bit more than 0.5% at this hour.

Bond markets, however, are following the risk narrative a bit more closely and have sold off mildly across the board.  Well mildly except for the PIGS, who have seen another day with average rises in yield of around 3 basis points.  But for havens, yields have risen just 1 basis point in the US, Germany and the UK.

Commodity prices are little changed on the session, seemingly caught between hopes for a stimulus deal and fears over increased covid cases.

And lastly, the dollar is arguably a bit softer overall, but not by that much.  Aside from Aussie and Kiwi mentioned above, only the yen (-0.15%) is lower vs. the dollar, which is classic risk-on behavior.  On the plus side, SEK and NOK (both +0.5%) are leading the way higher, although the euro has been grinding higher all session and is now up 0.4% compared to yesterday’s close.  There has been no news of note from either Sweden or Norway to drive the gains, thus the most likely situation is that both currencies are simply benefitting from their relatively high betas and the general trend of the day.  As to the euro, the technicians are in command today, calling for a move higher due to an expected (hoped for?) break of a symmetrical triangle position.  Away from these three, though, gains are extremely modest.

In the emerging markets, CZK (+0.7%) is the outlier on the high side, although there is no obvious driver as there have been neither comments by officials nor new data released.  In fact, given that Covid infections seem to be growing disproportionally rapidly there, one might have thought the Koruna would have fallen instead.  But the rest of the CE4 are also firmer, simply tracking the euro this morning as they are up by between 0.3%-0.4%.  There have been some modest losers in the space as well, with THB (-0.25%) leading the charge in that direction.  The Thai story is a combination over concerns about further stimulus there not materializing and anxiety over the political unrest and student protests gaining strength throughout the nation.

On the data front, this morning brings Housing Starts (exp 1465K) and Building Permits (1520K), as well as four more Fed speakers.  Yesterday, Chairman Powell was not focused on monetary policy per se, but rather on the concept of digital currencies, and specifically, central bank digital currencies.  This is something that is clearly coming our way, but the timing remains unclear.  One thing to keep in mind is that when they arrive, interest rates will be negative, at least in the front end, forever.  But that is a story for another day.

Today, we are beholden to the stimulus talks.  Positive news should see further risk accumulation, while a breakdown will see stocks fall and the dollar rebound.

Good luck and stay safe
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Willing to Meet

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The latest from 10 Downing Street
Is Boris is willing to meet
Midway twixt the stance
Of England and France
In order, the talks, to complete

Meanwhile, from the Far East we heard
That growth was strong in, quarter, third
They’re now set to be
The only country
Where year on year growth has occurred

The weekend has brought a few stories of note, all of them with bullish overtones, and so it should be no surprise that the week is starting with a risk-on tone.  The first place to look is in China, which released its Q3 GDP data last night at a slightly worse than expected 4.9% Y/Y.  While the market was looking for 5.5%, given that China is the first nation to achieve positive year over year growth, it was still seen as a market plus.  At least to the broad market. Interestingly, the Shanghai stock market fell 0.7%.  But, between the GDP data, Retail Sales rising 3.3% Y/Y and the Surveyed Jobless Rate falling a bit more than expected to 5.4%, the Chinese are painting a picture of a solid recovery.  And while this is well below the levels seen prior to the pandemic, it is still well ahead of the rest of the world.

Next up is the UK, where optimism has grown that a Brexit deal will, in fact, be reached. Boris, playing to both his constituents and the Europeans, has said that the UK is preparing for a no-deal outcome, but is happy to continue to talk if the Europeans would consider some compromises.  As well, in the House of Lords, word is they are prepared to remove the offending language from the UK government’s proposed Internal Market Bill, the one that caused all the concern since it was published in July.  In this bill, the UK sets out the relationship between the four nations in the UK; England, Scotland, Wales and Northern Ireland.  However, it was written in such a way as to render part of the Withdrawal Agreement moot, essentially overturning international law unilaterally.  Hence the issue.  In fact, the EU has sued the UK in the ICJ to prevent the law from being enacted.  This has been a major sticking point for the EU and has undermined a great deal of trust between the two sides.  Hence, the removal of that language is seen as a clear positive.  Certainly, FX traders saw it that way as the pound has rallied 0.75% since the news first was reported and is now back to 1.30.  While I believe the probability of a deal being completed remains above 50% (neither side wants a no-deal outcome), I also believe that the pound will fall after a deal is reached.  Sell the news remains the most likely situation in my view.

Adding to these two positive stories, the never-ending US stimulus talks continue to garner headlines despite a distinct lack of progress.  Yet, optimism on a stimulus bill seems to be a key driver in US equity markets, and in fact, in global ones as they are all, save Shanghai, propelled higher.  Given the proximity to the election, it seems unlikely that either side will allow the other to have a political victory, and so I remain skeptical a deal will be reached soon.  Of course, that merely means we can have a whole bunch of rallies on optimism that one will be reached!

With all that in mind, let’s take a look at the markets this morning.  Aside from Shanghai’s negative outcome in Asia, we saw strength with the Nikkei (+1.1%) and Hang Seng (+0.65%) both rallying nicely.  Europe as seen modest strength with the CAC (+0.6%) leading the way although the rest of the continent has seen far less love with the DAX (+0.1%), for instance, barely positive.  In fact, as I write, the FTSE 100 is actually slightly lower, down -0.15%.  US futures, though, have taken the stimulus story to heart and are much higher, between 0.8% (DOW) and 1.1% (NASDAQ).

Bond markets are feeling the risk-on mood as well, as they have fallen across the board with yields rising in every developed market.  Treasury yields are higher by 3.2 basis points, while bunds have seen a more modest 1.2 basis point rise.  Interestingly, the PIGS are seeing their bonds tossed overboard with an average rise of 4.5 basis points in their 10-year yields.

Oil prices (WTI -0.35%) are little changed, surprisingly, as one would expect commodities to rally on a positive risk day, while gold (+0.7%) and silver (+2.6%) are both quite strong, again somewhat surprising given higher yields and positive risk.  There are still many market relationships which have broken down compared to long-term trends.

Finally, the dollar is under pressure across the board this morning, with every G10 currency higher led by NOK (+0.95%) despite oil’s decline.  One of the drivers appears to be the unwinding of some large short positions in commodity currencies, a view that had been gaining credence amongst the leveraged community set.  This has helped SEK (+0.6%) and NZD (+0.55%) today as well.  The rest of the bloc, while higher, has been far less interesting.

On the EMG front, ZAR (+0.65%) is the leader with KRW (+0.5%) next in line.  After that, the gains are far less significant.  Korea’s won clearly benefitted from the Chinese GDP news, as China remains South Korea’s largest export destination.  Meanwhile, any gain in gold is likely to help support the rand given the gold mining industry’s importance to the economy there.  And as you consider the fact that the dollar is weak against virtually every currency, it is far more understandable that gold and silver have rallied as well.

On the data front, this week is not terribly interesting with only a handful of releases:

Tuesday Housing Starts 1455K
Building Permits 1506K
Wednesday Fed’s Beige Book
Thursday Initial Claims 865K
Continuing Claims 9.85M
Leading Indicators 0.7%
Existing Home Sales 6.30M
Friday Manufacturing PMI 53.5
Services PMI 54.6

Source: Bloomberg

However, despite a lack of data, there is no lack of Fedspeak this week, with six speeches just today, led by Chairman Powell at 8:00 on an IMF panel.  One of the themes of this week seems to be the discussion of central bank digital currencies, an idea that seems to be gaining traction around the world.  The other central bank tidbit comes from Madame Lagarde, who, not surprisingly, said she thought it made sense the PEPP (Pandemic EMERGENCY Purchase Program) be made a permanent vehicle.  This is perfectly in keeping with central bank actions where policies implemented to address an emergency morph into permanent policy tools as central bank mandates expand.  Once again, I will point out that the idea that other G10 central banks will allow the Fed to expand their balance sheet and undermine the dollar’s value without a response is categorically wrong. Every central bank will respond to additional Fed ease with their own package, thus this argument for a weaker dollar is extremely short-sighted.

But with all that said, there is no reason to believe the positive risk attitude will change today, unless there is a categorical denial by one of the parties discussing the stimulus bill.  As such, look for the dollar to continue to slide on the session.

Good luck and stay safe
Adf

Some Despair

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In Germany, data revealed
That growth there’s apparently healed
But data elsewhere
Implied some despair
As problems, porcine, are concealed

Risk is back in vogue this morning as the market appears to be responding positively to a much better than expected PMI reading from Germany (Services PMI 50.6, up from 49.1 Flash reading, Composite 54.7, up from 53.7 Flash) and a modestly better outcome for the Eurozone (48.0 vs. 47.6 for Services, 50.4 vs. 50.1 for Composite) as a whole.  At least that’s the surface story I keep reading.  The problem with this version is that markets in Asia were also highly risk-centric and that was well before the PMI data hit the tape.  Which begs the question, what is really driving the risk narrative today?

When President Trump was infected
The thing that most people expected
Was two weeks before
He’d walk out the door
Explaining he wasn’t affected

A different, and timelier, explanation for today’s positive risk sentiment stems from the ongoing story of President Trump’s covid infection and his ability to recuperate quickly.  While the standing assumption had been that there is a two-week timeline from infection to recovery, the President has consistently indicated that he feels fine, as have his doctors, and the story is that he will be released today from his weekend stay at Walter Reed Memorial Hospital.  In other words, any concerns that attended the announcement of his illness from Friday, when we did see equity markets suffer, is in the process of being unwound this morning.  The rationale here seems to be twofold.  First, the President is set to be back at the White House and in control, something which matters greatly from a national security perspective.  But second, the fact that he, as a 74-year-old man, was able to recover so quickly from the infection speaks to the reduced impact covid is likely to have on the population as a whole.  And arguably, that may even have a bigger impact.  While we continue to hear of new lockdown’s being announced in certain places, NYC, Spain and France to name just three, if the potency of the infection is waning such that it is a short-term event with limited side effects, that could well lead to an increase in confidence amongst the population.  And, of course, confidence is the one thing that the economy is searching for desperately.

The problem is that since virtually everything has become political theater lately, it is difficult to discern the facts in this situation.  As such, it seems hard to believe that overall confidence has been lifted that significantly, at least as of this morning.  However, if President Trump remains active and vigorous this week, it will certainly put a dent into the thesis that covid is incredibly debilitating.  We will need to watch how things evolve.

Interestingly, there is one issue that seems to be getting short shrift this morning, the growing concern that there will be no Brexit deal reached in the next ten days.  Recall that Boris and Ursula had a virtual lunch date on Saturday, and both claimed that a deal was close, but there were a couple of issues left to address.  The two key differences remain the issue of acceptable state aid by the UK government and, the big one, the type of access that European (read French) fishing vessels will have to UK waters.  It seems that French President Macron is adamant that the UK give the French a (large) annual quota and be done with it, while Boris is of the mind that they should agree to meet annually and discuss the issue based on the available fish stocks and conditions.  It also seems that the rest of Europe is getting a bit annoyed at Macron as for them, the issue is not that significant.  This fact is what speaks to an eventual climb-down by Macron, but, as yet, he has not been willing to budge on the matter.  Based on the price of the pound and its recent performance (+0.2% today, +1.0% in the past week), the market clearly believes a deal will be reached.  However, that also foretells a more significant decline in the event both sides fail to reach said agreement.

So, now let’s take a look at the bullishness in markets today.  Asia saw strength across the board with the Nikkei(+1.25%) and Hang Seng (+1.3%) nicely higher and Australia (+2.6%) really showing strength.  (China remains closed virtually all week for a series of national holidays).  European indices are all green as well, albeit not quite as enthusiastic as Asia.  Thus, we have seen solid gains from the three major indices, DAX, CAC and FTSE 100, all higher by 0.7%.  And finally, US futures are pointing to a stronger opening, with current pricing showing gains of between 0.7% and 1.0%.

It should be no surprise that bond marks are under some pressure with 10-year Treasury yields up to 0.71% this morning, higher by 1 basis point on the session and 6 bps in the past week.  In fact, yields are back at their highest level in a month.  European bonds are also broadly softer (higher yields) but the movement remains muted as well, about 1bp where they have risen.  And it should also not be surprising that Italy, Portugal and Greece have seen yields decline, as those three certainly qualify as risk assets these days.

Oil prices are firmer, again taking their cue from the confidence that is infusing markets overall, while precious metals prices are flat.  And finally, the dollar is definitely softer, except against the yen, which continues to be one of the best risk indicators around.  So, in the G10 space, NOK (+0.7%) is the leader, following oil as well as benefitting from the general dollar weakness.  Next on the list is CHF (+0.5%) where data showed ongoing growth in sight deposits, an indication that capital flows continue to enter the country, despite today’s risk attitude.  But broadly speaking, the whole space is firmer.

As to EMG currencies, ZAR (+0.7%) is the leader today, with firmer commodity prices and still the highest real interest rates around keeping the rand attractive in a risk-on environment.  But it is almost the entire bloc with the CE4 (CZK +0.55%, PLN +0.45%, HUF +0.45%) showing their high EUR beta characteristics and MXN (+0.45%) also performing well, again benefitting from both firmer oil prices as well as a weaker dollar.  The one exception here is RUB (-0.5%), which appears to be suffering from the effects of the ongoing conflict in Nagorno-Karabakh and how much it is going to cost Russia to maintain its support for Armenia.

On the data front, it is a relatively quiet week with only a handful of numbers to be released:

Today ISM Services 56.2
Tuesday Trade Balance -$66.2B
JOLTs Job Openings 6.5M
Wednesday FOMC Minutes
Thursday Initial Claims 820K
Continuing Claims 11.4M

Source: Bloomberg

However, what we lack in data we make up for with Fedspeak, as eight different speakers, including Chairman Powell tomorrow, speak at 13 different events.  What we have heard lately is there is a growing difference of opinion by some FOMC members regarding the robustness of the US economic rebound.  However, despite those differences, the universal request is for further fiscal stimulus.  Given the dearth of data this week, I expect that Chairman Powell’s speech tomorrow morning is likely to be the most important thing we hear, barring a Brexit breakthrough or something else from the White House.

Good luck and stay safe
Adf

Spring Remains Distant

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From Brussels, a letter was sent
To London, with which the intent
Was telling the British
The EU’s not skittish
So, don’t try, rules, to circumvent

The pound is under pressure this morning, -0.6%, after it was revealed that the EU is inaugurating legal proceedings against the UK for beaching international law.  The details revolve around how the draft Internal Market Bill, that has recently passed through the House of Commons, is inconsistent with the Brexit agreement signed last year.  The specific issue has to do with the status of Northern Ireland and whether it will be beholden to EU law or UK law, the latter requiring a border be erected between Ireland, still an EU member, and its only land neighbor, Northern Ireland, part of the UK.  Apparently, despite the breathless headlines, the EU sends these letters to member countries on a regular basis when they believe an EU law has been breached.  As well, it apparently takes a very long time before anything comes of these letters, and so the UK seems relatively nonplussed over the issue.  In fact, given that the House of Lords, which is not in Tory control, is expected to savage the bill, it remains quite unclear as to whether or not this will be anything more than a blip on the Brexit trajectory.

However, what it did highlight was that market participants have grown increasingly certain that an agreement will be reached, hence the pound’s recent solid performance, and that this new wrinkle was enough for weak hands to be scared from their positions.  At this point, almost everything that both sides are doing publicly is simply intended to achieve negotiating leverage as time runs out on reaching a deal.  Alas for Boris, I feel that his biggest enemy is Covid, not Brussels, as the EU is far more concerned over the pandemic impact and how to respond there.  At the margin, while a hard Brexit is not preferred, the fear of the fallout in Brussels has clearly diminished, and so the opportunity for a hard Brexit to be realized has risen commensurately.  And the pound will fall further if that is the outcome.  The current thinking is there are two weeks left for a deal to be reached so expect more headlines in the interim.

The Tankan painted
A picture in black and white
Spring remains distant

Meanwhile, it is still quite cloudy in the land of the rising sun, at least as described by the Tankan surveys.  While every measure of the surveys, both small and large manufacturing and non-manufacturing indices, improved from last quarter by a bit, every one of them fell short of expectations.  The implication is that PM Suga has his work cut out for him in his efforts to get economic activity back up and running.  You may recall that CPI data on Monday showed deflation remains the norm, and weak sentiment is not going to help the situation there.  At the same time, capital flows continue to show significant foreign outflows in both stock and bond markets there.  It was only two weeks ago that the JPY (-0.1% today) appeared set to break through the 104 level with the dollar set to test longer term low levels.  Of course, at that time, the market narrative was all about the dollar falling sharply.  Well, both of those narratives have evolved, and if capital continues to flow out of Japan, it is hard to make the case for yen strength.  Remember, the BOJ is never going to be seen as relatively tighter in its policy stance, so a firmer yen would require other drivers.  Right now, they are not in evidence.

And frankly, those are the two most interesting stories in the market today.  Arguably, the one other theme that has gained traction is the rise in layoffs by large corporations in the US.  Yesterday nearly 40,000 were announced, which is at odds with the idea that the economy here is going to rebound sharply.  On an individual basis, it is easy to understand why any given company is reducing its workforce in the current economic situation.  Unfortunately, the picture it paints for the immediate future of the economy writ large is one of significant short-term pain.  Given this situation, it is also easy to understand why so many are desperate for Congress to agree a new stimulus bill in order to support the economy.  And it’s not just elected officials who are desperate, it is also the entire bullish equity thesis.  Because, if the economy turns sharply lower, at some point, regardless of Fed actions, equity markets will reprice lower as well.

But that is not happening today.  As a matter of fact, equities are looking pretty decent, yet again.  China is closed for a series of holidays, but the overnight session saw strength in Australia (+1.0%) although the Nikkei (0.0%) couldn’t shake off the Tankan blues.  Europe, however, is all green led by the FTSE 100 (+0.9% despite that letter) with the CAC (+0.65%) and DAX (+0.1%) also positive.  US futures are all pointing higher with gains ranging from 0.8%-1.25%.

Bond markets actually moved yesterday, at least a little bit, with 10-year Treasury yields now at 0.70%.  Yesterday saw a 3.5 basis point move with the balance occurring overnight.  Given yesterday’s equity rally, this should not be that surprising, but given the recent remarkable lack of movement in the bond market, it still seems a bit odd.  European bond markets are behaving in a full risk on manner as well, with havens like Bunds, OATS and Gilts all seeing yields edge higher by about 1bp, while Italy and Greece are seeing increased demand with modestly lower yields.

As to the dollar overall, despite the pound’s (and yen’s) weakness, it is the dollar that is under pressure today against both G10 and EMG currencies.  Today’s leader in the G10 clubhouse is NOK (+0.55%) which is a bit odd given oil’s 1.0% decline during the session.  But after that, the movement has been far less enthusiastic, between 0.1% and 0.3%, which feels more like dollar softness than currency strength.

EMG currencies, however, are showing some real oomph this morning with the CE4 well represented (HUF +1.15%, PLN +0.85%) as well as MXN (+1.05%) and INR (+0.85%).  The HUF story revolves around the central bank leaving its policy rate on hold after a surprise 0.15% rise last week.  This was taken as a bullish sign by investors as the central bank continues to focus on above-target inflation there.  Meanwhile, inflation in Poland rose 3.2% in a surprise, above their target and has encouraged views that the central bank may need to tighten policy further, hence the zloty’s strength today.  The India story revolves around the government not increasing their borrowing needs, despite their response to Covid, which helped drive government bond investor inflows and rupee strength.  Finally, the peso seems the beneficiary of the overall risk-on attitude as well as expectations for an uptick in foreign remittances, which by definition are peso positive.

On the data front, yesterday saw ADP surprise higher by 100K, at 749K.  As well, Chicago PMI, at 62.4, was MUCH stronger than expected.  This morning brings Initial Claims (exp 850K), Continuing Claims (12.2M), Personal Income (-2.5%), Personal Spending (0.8%), Core PCE (1.4%) and ISM Manufacturing (56.4).  US data, despite the layoff story, has clearly been better than expected lately, and this can be seen in the increasingly positive expectations for much of the data.  While European PMI data this morning was right on the button, the numbers remain lower than those seen in the US.  In addition, the second wave is clearly hitting Europe at this time, with Covid cases growing more rapidly there than back in March and April when it first hit.  As much as many people want to hate the dollar and decry its debasement (an argument I understand) it is hard to make the case that currently, the euro is a better place to be.  While the dollar is soft today, I believe we are much closer to the medium-term bottom which means hedgers should be considering how to take advantage of this move.

Good luck and stay safe
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Signs of Dissension

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In China they claim that firms grew
Their profits and gross revenue
Encouraged by this
The bulls added risk
While bears had to rethink their view

Quite frankly, it has been a fairly dull session overnight with virtually no data and only a handful of comments.  Risk appetite is in the ascension after the Chinese reported, Saturday night, that Industrial Profits rose 19.1% Y/Y.  What’s truly remarkable about that statistic, and perhaps what makes it difficult to accept, is that throughout most of 2019, those numbers were negative.  In other words, prior to the outbreak of Covid-19, Chinese firms were struggling mightily to make money.  But since the very sharp dip in March, the rebound there, at least in this statistic, has been substantial.  While it is certainly possible that organic growth is the reason for this sharp rebound, it seems far more likely that PBOC support has been a key factor.  Remember, while they don’t get as much press as the Fed or ECB, they are extremely involved in the economy as well as financial markets.  After all, there is no semblance of independence from the government.

According to those in the know
The ECB’s starting to show
Some signs of dissension
Amid apprehension
The rate of inflation’s too low

In one camp the PIGS all believe
More money they ought to receive
But further up north
The hawks have put forth
The view PEPP should end New Year’s Eve

Meanwhile, the other story that is building is the growing split in the ECB between the hawks and doves regarding how to react to the evolving situation.  The breakdown is exactly as expected, with Italian, Spanish and Portuguese members calling for more support, via an expansion of the PEPP by December, latest, in order to assure those economies still suffering the aftereffects of the Covid shutdowns, that the ECB will prevent borrowing costs from rising.  Meanwhile, the hawkish set, led by Yves Mersch, the Luxembourgish ECB governor, sees the glass half full and has explained there is no need for further action as the economy looks much better.  Naturally, German, Dutch and Austrian members are on board with the latter view.  Madame Lagarde, the consensus builder, certainly has her work cut out to get policy agreement by the next meeting at the end of October.

Adding to the difficulty for the ECB is the apparent strength of the second wave of the virus that is truly sweeping the Continent.  While France has been the worst hit, with more than 11,000 new cases reported yesterday, the Netherlands, Belgium, Italy and Germany are all seeing caseloads as high, or higher, than the initial wave back in March.  European governments are reluctant to force another shutdown as the economic consequences are too severe, but they feel the need to do something that will demonstrate they are in control of the situation.  Look for more rules, but no mandatory shutdowns.

And remarkably, those are the only economically focused stories of the session.  The ongoing US presidential campaigns, especially now that the first debate is nearly upon us, has captured the bulk of the US press’s attention, although the angst over the Supreme Court nomination of Judge Amy Coney Barrett has probably been the cause of more spilled digital ink in the past several days.

So, a turn toward markets shows that Asian markets generally performed well (Nikkei +1.3%, Hang Seng +1.0%) although interestingly, despite the Chinese profits data, Shanghai actually fell -0.1%.  Europe, on the other hand, is uniformly green, led by the DAX (+2.7%) and CAC (+2.0%), with the FTSE 100 higher by a mere 1.5%.  US futures have taken their cues from all this and are currently pointing to openings nearly 1.5% higher than Friday’s closing levels.

Bond markets continue to offer little in the way of price signals as central bank activity continues to be the dominant force.  I find it laughable that Fed members are explaining they don’t want to increase QE because they don’t want to have an impact on the bond market.  Really?  Between the Fed and the ECB, the one thing in which both have been successful is preventing virtually any movement, up or down, in yields.  This morning sees the risk-on characteristic of a rise in Treasury and Bund yields, but by just 1.5bps each, and both remain well within their recent trading ranges.  Yield curve control is here in all but name.

As to the dollar, it is softer vs. its G10 counterparts with the pound (+1.25%) rising sharply in the past few minutes as the tone leading up to the restart of Brexit negotiations tomorrow has suddenly become quite conciliatory on both sides.  But we have also seen solid gains in SEK (+0.7%), NOK (+0.6%) and AUD (+0.5%).  The Stocky story has to do with the fact that the Riksbank did not receive any bids for credit by the banking community, implying the situation in the economy is improving.  As to NOK and AUD, a reversal in oil and commodity prices has been seen as a positive in both these currencies.

In the emerging markets, the picture is a bit more mixed with ZAR (+0.3%) as the leading gainer, although given the relative movement in the G10 space, one would have expected something more exciting.  On the downside, TRY (-1.65%) and RUB (-0.85%) are outliers as the declaration of war between Armenia (Russian-backed) and Azerbaijan (Turkish-backed), has raised further concerns about both nations’ financial capabilities to wage a hot war at this time.

On the data front, while the week has started off slowly, we have a lot to absorb culminating in Friday’s NFP numbers.

Tuesday Case Shiller Home Prices 3.60%
Consumer Confidence 90.0
Wednesday ADP Employment 630K
Q2 GDP -31.7%
Chicago PMI 52.0
Thursday Initial Claims 850K
Continuing Claims 12.25M
Personal Income -2.5%
Personal Spending 0.8%
Core PCE 0.3% (1.4% Y/Y)
Construction Spending 0.7%
ISM Manufacturing 56.3
ISM Prices Paid 59.0
Friday Non Farm Payrolls 850K
Private Payrolls 850K
Manufacturing Payrolls 38K
Unemployment Rate 8.2%
Average Hourly Earnings 0.2% (4.8% Y/Y)
Average Weekly Hours 34.6
Participation Rate 61.9%
Michigan Sentiment 78.9
Factory Orders 1.0%

Source: Bloomberg

On top of the data, we have thirteen Fed speeches by eight different Fed speakers, although the Chairman is mute this week.  It seems unlikely that we will get a mixed message from this group, but it is not impossible.  After all, we have both the most hawkish (Mester today) and the most dovish (Kashkari on Wednesday) due, so the chance for some disagreement there.  As to the data, it would appear that the payroll data will be most important, but do not ignore the PCE data.  Remember, both PPI and CPI have been surprising on the high side the past two months, so a surprise here might get some tongues wagging, although I wouldn’t expect a policy change, that’s for sure.

Net, with a positive risk backdrop, it is no surprise to see the dollar under pressure.  However, I expect that we are more likely to see a modest reversal than a large extension of the move unless stocks can go up sharply from their already elevated levels.

Good luck and stay safe
Adf

A Shot of Caffeine

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It’s true that, eternal, hope springs
And sessions like this give it wings
The news, seemingly
Is twixt Trump and Xi
Less angst will lead to better things

As well, hope has grown, a vaccine
Is likely, this year, to be seen
Now bulls rule the roost
Thus, giving a boost
To stocks like a shot of caffeine

Another day, another round of stories seemingly designed solely to boost equity markets around the world.  The first of these is a bit oblique, as the word from ‘insiders’ is that the Trump administration, despite its increasingly vocal hard line vs. the Chinese, is maintaining back channel communications, specifically regarding the WeChat app, and US companies’ ability to continue to use it in their advertising and marketing campaigns in China.  This is important as WeChat is a critical advertising venue for virtually every company in China, and if the mooted ban by the Trump administration in the US was a world-wide ban, most US companies would see their Chinese businesses devastated. If we forget, for a moment, the convenient timing of these leaked comments, this is, unarguably, good news for those US companies active in China.  Certainly, this is worth some added value to equity prices.

But let’s unpack the second story, the one about the vaccine.  While this weekend saw an announcement for the approval of another treatment, convalescent plasma injections, the big prize remains a working vaccine that is both safe and efficacious.  Briefly, the idea behind the plasma injections is that individuals who have recovered from the disease have antibodies in their blood, which can be separated and injected into severely ill patients in an effort to boost the patient’s own disease fighting capability.  As in everything to do with Covid-19, it remains experimental and there is controversy as to how well the therapy may work.  But given the desperation of some patients to get something done, the President has decided to overrule other voices and give emergency clearance.  However, this is a treatment, not a preventative.

The vaccine remains the holy grail.  To date, there are on the order of 180 different vaccines in various stages of development, 10 of which are in Phase 3 or have been given limited approvals.  Clearly, pharmaceutical companies see this as the newest potential blockbuster drug.  But the real question seems to be, even when (if) a vaccine is created, will it really change the nature of the spread of Covid-19 by that much?  It is unambiguous that the market narrative’s answer to that question is a resounding yes.  However, perhaps it is worth casting a skeptical eye on the idea.

Using influenza as our model, as it is the closest thing we have with respect to its contagion and even the structure of the disease and working under the assumption that human nature remains constant, the numbers don’t point to a vaccine as panacea.

Consider, in the US, roughly 45% of the population receives the flu vaccine each year.  In addition, it is only effective for, at most, two-thirds of those who do receive the vaccine.  Thus, the protective ‘shield’ that the flu vaccine creates is effective for roughly 30% of the population.  One of the reasons we consistently hear so much every year about getting the flu vaccine via PSA’s is that the virology community calculates we need a greater percentage of the population vaccinated to achieve a herd immunity.  And yet, the 45% inoculation rate has been pretty steady for years.  Human nature is pretty hard to change.

This begs the question, will the take-up of a Covid-19 vaccine be higher than that for the flu?  And if so, will it reach the level’s necessary to achieve herd immunity, thus encouraging governments to relax many of the current restrictions and people to resume some semblance of their former lives?

The argument for a higher take-up rate is that the media has gone out of its way to highlight the deadliness of Covid-19, in some cases exaggerating the numbers for effect, in what appears to be an attempt to sow fear in the population.  The underlying belief to this strategy is to convince a large portion of the population of the criticality of receiving the vaccine once it becomes available.  And perhaps this will be a successful strategy.  But human nature has taken a long time to evolve to where it currently resides, and the case for a flu-like take-up rate, and thus a failure to achieve herd immunity, is based on the idea that unless one has been sickened already, or personally knows someone who has, it is hard to make the case that inoculation rates will increase over those of the flu vaccine.

Alas, my money is on the under.  However, will that matter for the markets?  That is an entirely different question, and one which speaks to confidence, not data.  At this time, I would contend the underlying market belief is that a vaccine is going to be approved, and be effective, within the next twelve months.  The result will be an end to the lockdowns and a resumption in economic activity worldwide that is much closer to the pre-Covid time.  But if this is so, one needs to be careful that we are not looking at the biggest ‘but the rumor’ reaction in history, and that the approval of a safe vaccine could well be the proverbial bell for the top of the equity market.  Remember, economic growth is still a product of population growth and productivity, and there is nothing about a Covid vaccine that will have increased either of those from pre-Covid days.

That exceptionally long discussion was driven by the remarkable ongoing rally in risk assets seen this morning.  Equity markets in Asia were all higher (Nikkei +0.3%, Hang Seng +1.75%) and Europe is really on fire (DAX +2.3%, CAC +2.15%).  US futures are currently 1.0% higher and climbing.  Bonds are under modest pressure, with 10-year yields higher by 1 basis point in the US and most of Europe.  Oil prices, along with gold, are higher by 0.5%-0.7%, modest by their recent standards.  And the dollar is definitely under a bit of pressure.

In the G10 space, SEK and AUD lead the way, both higher by 0.5%, although the gains are fairly solid across the board.  In fact, despite extending the lockdown in Auckland, NZ, kiwi has retraced early losses and is higher by 0.25%.  In the EMG bloc, ZAR leads the way, up 1.2%, as the combination of risk positive stories and higher commodity prices continues to encourage investors to buy South African bonds.  But virtually the entire space is firmer this morning with two outliers, KRW (-0.25%) which fell after the central bank downgraded the economic outlook further, and TRY (-0.8%), which continue to see capital flee as the central bank is prevented by President Erdogan from raising rates.

There has been virtually no data today, and in truth, all eyes will be on Chairman Powell Thursday morning, when he speaks at the virtual Jackson Hole gathering.  Expectations are he is going to outline the new Fed framework, with a higher inflation target, and other potential changes.  But we will look into that later this week.  As for today, I see no reason to believe that the current risk attitude is going to change, so further dollar weakness is likely on the cards.

Good luck and stay safe
Adf

Faded Away

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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
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