Poison Pens

The headlines all weekend have shouted
The dollar is sure to be routed
If Covid-19
Remains on the scene
A rebound just cannot be touted

But ask yourself this my good friends
Have nations elsewhere changed their trends?
Infections are rising
Despite moralizing
By pundits who wield poison pens

Based on the weekend’s press, as well as the weekly analysis recaps, the future of the dollar is bleak. Not only is it about to collapse, but it will soon lose its status as the world’s reserve currency, although no one has yet figured out what will replace it in that role. This is evident in the sheer number of articles that claim the dollar is sure to decline (for those of you with a Twitter account, @pineconemacro had a great compilation of 28 recent headlines either describing the dollar’s decline or calling for a further fall), as well as the magnitude of the short dollar positions in the market, as measured by CFTC data. As of last week, there are record long EUR positions and near-record shorts in the DXY.

So, the question is, why does everybody hate the dollar so much? It seems there are two reasons mentioned most frequently; the impact of unbridled fiscal and monetary stimulus and the inability of the US to get Covid-19 under control. Let’s address them in order.

There is no question that the Fed and the Treasury, at the behest of Congress, have expended extraordinary amounts of money to respond to the Covid crisis. The Fed’s balance sheet has grown from $4.2 trillion to $7.0 trillion in the course of four months. And of course, the Fed has basically bought everything except your used Toyota in an effort to support market functionality. And it is important to recognize that what they continue to explain is that they are not supporting asset prices per se, rather they are simply insuring that financial markets work smoothly. (Of course, their definition of working smoothly is asset prices always go higher.) Nonetheless, the Fed has been, by far, the most active central bank in the world with respect to monetary support. At the same time, the US government has authorized about $3.5 trillion, so far, of fiscal support, although there is much anxiety now that the CARES act increase in unemployment benefits lapsed last Friday and there is still a wide divergence between the House and Senate with respect to what to do next.

But consider this; while the US is excoriated for borrowing too much and expanding both the budget deficit and the amount of debt issued, the EU was celebrated for coming to agreement on…borrowing €2 trillion to expand the budget deficit and support the economies of each nation in the bloc. Debt mutualization, we have been assured, is an unalloyed good and will help the EU’s overall economic prospects by allowing the transfer of wealth from the rich northern nations to the less well-off southern nations. And of course, given the collective strength of the EU, they will be able to borrow virtually infinite sums from the market. Perhaps it is just me, but the stories seem pretty similar despite the spin as to which is good, and which is bad.

The second issue for the dollar, and the one that is getting more press now, is the fact that the US has not been able to contain Covid infections and so we are seeing a second wave of economic shutdowns across numerous states. You know, states like; Victoria, Australia; Melbourne, Australia; Tokyo, Japan; the United Kingdom and other large areas. This does not even address the ongoing spread of the disease through the emerging markets where India and Brazil have risen to the top of the worldwide caseload over the past two months. Again, my point is that despite reinstituted lockdowns in many places throughout the world, it is the US which the narrative points out as the problem.

It is fair to describe the dollar’s reaction function as follows: it tends to strengthen when either the US economy is outperforming other G10 economies (a situation that prevailed pretty much the entire time since the GFC) or when there is unbridled fear that the world is coming to an end and USD assets are the most desirable in the world given its history of laws and fair treatment of investors. In contrast, when the US economy is underperforming, it is no surprise that the dollar would tend to weaken. Well the data from Q2 is in and what we saw was that despite the worst ever quarterly decline in the US, it was dwarfed by the major European economies. At this time, the story being told seems to be that in Q3, the rest of the world will rapidly outpace the US, and perhaps it will. But that is a pretty difficult case to make when, first, Covid inspired lockdowns are popping up all around the world and second, the consumer of last resort (the US population) has lost their appetite to consume, or if not lost, at least reduced.

Once again, I will highlight that the dollar, while definitely in a short-term weakening trend, is far from a collapse, and rather is essentially right in the middle of its long-term range. This is not to say that the dollar cannot fall further, it certainly can, but do not think that the dollar is soon to become the Venezuelan bolivar.

And with that rather long-winded defense of the dollar behind us, let’s take a look at markets today. Equity markets continue to enjoy central bank support and have had an overall strong session. Asia saw gains in the Nikkei (+2.25%) and Shanghai (+1.75%) although the Hang Seng (-0.55%) couldn’t keep up with the big dogs. Europe’s board is no completely green, led by the DAX (+2.05%) although the CAC, which was lower earlier, is now higher by 1.0%. And US futures, which had spent the evening in the red are now higher as well.

Bond markets are embracing the risk-on attitude as Treasury yields back up 2bps, although are still below 0.55% in the 10-year. In Europe, the picture is mixed, and a bit confusing, as bund yields are actually 1bp lower, while Italian BTP’s are higher by 2bps. That is exactly the opposite of what you would expect for a risk-on session. But then, the bond market has not agreed with the stock market since Covid broke out.

And finally, the dollar, is having a pretty strong session today, perhaps seeing a bit of a short squeeze, as I’m sure the narrative has not yet changed. In the G10, all currencies are softer vs. the greenback, led by CHF (-0.6%) and AUD (-0.55%), although the pound (-0.5%) which has been soaring lately, is taking a rest as well. What is interesting about this move is that the only data released overnight was the monthly PMI data and it was broadly speaking, slightly better than expected and pointed to a continuing rebound.

EMG currencies are also largely under pressure, led by ZAR (-1.15%) and then the CE4 (on average -0.7%) with almost the entire bloc softer. In fact, the outlier is RUB (+0.8%), which seems to be the beneficiary of a reduction in demand for dollars to pay dividends to international investors, and despite the fact that oil prices have declined this morning on fears that the OPEC+ production cuts are starting to be flouted.

It is, of course, a huge data week, culminating in the payroll report on Friday, but today brings only ISM Manufacturing (exp 53.6) with the New Orders (55.2) and Prices Paid (52.0) components all expected to show continued growth in the economy.

With the FOMC meeting now behind us, we can look forward, as well, to a non-stop gabfest from Fed members, with three today, Bullard, Barkin and Evans, all set to espouse their views. The thing is, we already know that the Fed is not going to touch rates for at least two years, and is discussing how to try to push inflation higher. On the latter point, I don’t think they will have to worry, as it will get there soon enough, but their models haven’t told them that yet. At any rate, the dollar has been under serious pressure for the past several months. Not only that, most of the selling seems to come in the US session, which leads me to believe that while the dollar is having a pretty good day so far, I imagine it will soften before we log out this evening.

Good luck and stay safe
Adf

 

Second Wave

In Q2 we learned to behave
Like primitives stuck in a cave
In order to stem
The virus mayhem
And millions of lives, try to save

But Q3 has shown that we crave
More contact than lockdown, us, gave
Thus, it’s not surprising
Infections are rising
And now we’ve achieved second wave

If I were to describe market behavior of late, the word I would use is tentative. Investors and traders are caught between wanting to believe that the nonstop stimulus efforts on both fiscal, and especially, monetary fronts will be sufficient to help the economy through the current economic crisis (conveniently ignoring the extraordinary build up in debt), and concerns that there is too much permanent damage to too many businesses to allow for a swift recovery to a pre-Covid level of activity. Adding to the fear side of the equation is the resurgence in the number of infections worldwide, especially in places that had seemed to eradicate the virus. News from Hong Kong, Australia, China and India shows that the virus is making a resurgence, with several places recording more cases now than when things started five to six months ago. And of course, we have seen the same pattern in states that were first to reopen here at home.

Meanwhile, the medical community continues its extraordinary efforts to find a vaccine, with several promising candidates making their way through trials. Perhaps the best medical news is that it seems doctors on the front line have learned how to treat the disease more effectively, which has reduced the number of critical cases and helped drive down the fatality rate. Alas, an effective vaccine remains elusive. Ironically, the vaccine’s importance in many ways is symbolic. The idea that there is a way to avoid catching the bug is certainly appealing, but if the flu vaccine is any harbinger of the outcome, a minority of people will actually get vaccinated. So, the vaccine story is more about a chance for confidence to be restored than about people’s health. Perhaps this sums up the state of human affairs these days better than anything else.

And yet, while no politician anywhere will allow confirmation, it certainly appears that we are seeing a second wave of infections spread worldwide. From the market’s perspective, this has been a key concern for the past several months as a second wave of economy-wide shutdowns would end all hopes of that elusive V-shaped recovery. And the only way to justify the current levels of asset values is by assuming this crisis will pass quickly and things will return to a more normal framework. Hence the trader’s dilemma. Is the worst behind us? Or is a second wave going to expand and delay the recovery further? Perhaps the most telling feature of this market is the changed relationship between the S&P 500 and the VIX index. Prior to the Covid-19 outbreak, an equity rally of the type seen since late March would have seen the VIX index collapse toward 15, the level at which it traded for virtually all of 2019. But this time, 30 has become the new normal for the VIX, a strong indication that investors are paying for protection, despite the cost, as there remains an underlying fear of another sharp decline beyond the horizon. Hence, my description of things as tentative.

Looking at markets this morning, tentative is an excellent descriptor. In the equity space, Asian markets were mixed, with the Nikkei (-0.3%) on the weak side with the Hang Seng (+0.5%) was the strong side. But given the type of movement we have seen lately, neither really displayed anything new at the end of the week. European markets are also mixed with the DAX (+0.5%) the best performer while Spain’s IBEX (-0.5%) is the worst. Again, a mix of performances with no evident trend. US futures are currently pointing higher although only the NASDAQ (+1.0%) is showing any real strength.

Meanwhile, Treasury yields have slipped again, with the 10-year down to 0.60%, its lowest level since mid-April and just 4bps from its historic low. That is hardly a sign of economic confidence. In Europe, the picture is mixed but yields are essentially within 1bp of where they closed yesterday as traders are unwilling to take a view.

Finally, the dollar, too, is having a mixed session, although if I had to characterize it, I would say it is slightly softer overall. The euro is higher by 0.3% this morning as there is hope that the EU Summit, which began a few hours ago, will come to an agreement on their mooted €750 billion pandemic plan that includes joint borrowing. Of course, the frugal four still need to be bought off in some manner but given the political determination to be seen to be doing something, I would look for a watered-down version of the bill to be agreed. However, the best performer today is CHF (+0.5%) in what appears to be some profit taking on EURCHF positions after the cross’s strong rally this week.

In the emerging markets, IDR is the big underperformer today, falling 0.5% overnight as traders position for future rate cuts by the central bank. While they cut 25bps yesterday, they also came across as more dovish than expected implying they are not yet done with the rate hatchet. On the plus side, ZAR (+0.6%) is top of the charts as investors have been flocking to the front end of their yield curve after a much lower than expected inflation print. The view is that the SARB has further to cut which will drive front end yields down, hence the buying. (The dichotomy between the two currencies is fascinating as both are moving on rate cut assumptions, but in opposite directions. Hey, nobody ever said FX was rational!) But we are seeing more gainers than losers as the CE4 track the euro higher and several APAC currencies also moved modestly higher overnight. Remember, one of the emerging narratives has been the dollar’s imminent decline on the back of the twin deficits and lost prestige in the world community. So, every time we see a day where the dollar declines, you can be sure you will see stories on that topic. And while the twin deficit story is certainly valid from a theoretical basis, it has never been a good short-term indicator of movement in the currency markets.

On the data front, yesterday saw US Retail Sales print at a better than expected 7.5%, but Initial Claims fall less than expected, with still 1.3 million first time claims. As I have mentioned, that number continues to be the timeliest indicator of what is happening, and it is certainly not declining very rapidly anymore. Today brings Housing Starts (exp 1189K) and Building Permits (1293K) at 8:30 and then Michigan Sentiment (79.0) at 10:00. Neither of these seem likely to have a major market impact. Rather, as earnings season progresses, I expect the ongoing reports there to drive equity markets and overall risk appetite. For now, nobody is very hungry for risk, but a few good numbers could certainly change that view, pushing stocks higher and the dollar lower.

Good luck, good weekend and stay safe
Adf

Prepare For Impact

The second wave nears
A swell? Or a tsunami?
Prepare for impact

The cacophony of concern is rising as the infection count appears to be growing almost everywhere in the world lately. Certainly, here in the US, the breathless headlines about increased cases in Texas, Florida and Arizona have dominated the news cycle, although it turns out some other states are having issues as well. For instance:

In Cali the growth of new cases
Has forced them to rethink the basis
Of easing restrictions
Across jurisdictions
So now they have shut down more places

In fact, it appears that this was the story yesterday afternoon that turned markets around from yet another day of record gains, into losses in the S&P and a very sharp decline in the NASDAQ. And it was this price action that sailed across the Pacific last night as APAC markets all suffered losses of approximately 1.0%. These losses resulted even though Chinese trade data was better than expected for both imports (+2.7% Y/Y) and exports (+0.5% Y/Y) seemingly indicating that the recovery was growing apace there. And, given the euphoria we have seen in Chinese stock markets specifically, it was an even more surprising outcome. Perhaps it is a result of the increased tensions between the US and China across several fronts (Chinese territorial claims, defense sales to Taiwan, sanctions by each country on individuals in the other), but recent history has shown that investors are unconcerned with such things. A more likely explanation is that given the sharp gains that have been seen throughout equity markets in the region lately, a correction was due, and any of these issues could have been a viable catalyst to get it started. After all, a 1% decline is hardly fear inducing.

The problem is not just in the US, though, as we are seeing all of Europe extend border closures for another two weeks. The issue here is that even though infections seem to be trending lower across the Continent, the fact that they will not allow tourists from elsewhere to come continues to devastate those economies which can least afford the situation like Italy, Spain and Greece. The result is that we are likely to continue to see a lagging growth response and continued, and perhaps increased, ECB largesse. Remember all the hoopla regarding the announcement that the EU was going to borrow huge sums of money and issue grants to those countries most in need? Well, at this point, that still seems more aspirational than realistic and the idea that there would be mutualized debt issuance remains just that, an idea, rather than a reality. While the situation in the US remains dire, it is hard to point to Europe and describe the situation as fantastic. One of the biggest speculative positions around these days, aside from owning US tech stocks, is being short the dollar, with futures in both EUR and DXY approaching record levels. While the dollar has clearly underperformed for the past several weeks, it has shown no indication of a collapse, and quite frankly, a short squeeze feels like it is just one catalyst away. Be careful.

Meanwhile, ‘cross the pond, the UK
Saw GDP that did display
A slower rebound
And thus, they have found
Most people won’t come out and play

As we approach the final Brexit outcome at the end of this year, investors are beginning to truly separate the UK from the EU in terms of economic performance.  Alas, for the pound, the latest data from the UK was uninspiring, to say the least.  Monthly GDP in May, the anticipated beginning of the recovery, rose only 1.8%, with the 3M/3M result showing a -19.1% outcome.  IP, Construction and Services all registered worse than expected results, although the trade data showed a surplus as imports collapsed.  The UK is continuing to try to reopen most of the economy, but as we have seen elsewhere throughout the world, there are localized areas where the infection rate is climbing again, and a second lockdown has been put in place.  The market impact here has been exactly what one would have expected with the FTSE 100 (-0.4%) and the pound (-0.3%) both lagging.

To sum things up, the global economy appears to be reopening in fits and starts, and it appears that we are going to continue to see a mixed data picture until Covid-19 has very clearly retreated around the world.

A quick look at markets shows that the Asian equity flu has been passed to Europe with all the indices there lower, most by well over 1.0%, although US futures are currently pointing higher as investors optimistically await Q2 earnings data from the major US banks starting today.  I’m not sure what they are optimistic about, as loan impairments are substantial, but then, I don’t understand the idea that stocks can never go down either.

The dollar, overall, is mixed today, with almost an equal number of gainers and losers in both the G10 and EMG blocs.  The biggest winner in the G10 is SEK (+0.6%), where the krona has outperformed after CPI data showed a higher than expected rate of 0.7% Y/Y.  While this remains far below the Riksbank’s 2.0% target, it certainly alleviates some of the (misguided) fears about a deflationary outcome.  But aside from that, most of the block is +/- 0.2% or less with no real stories to discuss.

On the EMG side, we see a similar distribution of outcomes, although the gains and losses are a bit larger.  MXN (+0.65%) is the leader today, as it seems to be taking its cues from the positive Chinese data with traders looking for a more positive outcome there.  Truthfully, a quick look at the peso shows that it seems to have found a temporary home either side of 22.50, obviously much weaker than its pre-Covid levels, but no longer falling on a daily basis.  Rather, the technical situation implies that by the end of the month we should see a signal as to whether this has merely been a pause ahead of much further weakness, or if the worst is behind us, and a slow grind back to 20.00 or below is on the cards.

Elsewhere in the space we see the CE4 all performing well, as they follow the euro’s modest gains higher this morning, but most Asian currencies felt the sting of the risk-off sentiment overnight to show modest declines.

On the data front, this week brings the following information:

Today CPI 0.5% (0.6% Y/Y)
  -ex food & energy 0.1% (1.1% Y/Y)
Wednesday Empire Manufacturing 10.0
  IP 4.4%
  Capacity Utilization 67.8%
  Fed’s Beige Book  
Thursday Initial Claims 1.25M
  Continuing Claims 17.5M
  Retail Sales 5.0%
  -ex auto 5.0%
  Philly Fed 20.0
  Business Inventories -2.3%
Friday Housing Starts 1180K
  Building Permits 1290K
  Michigan Sentiment 79.0

Source: Bloomberg

So, plenty of data for the week, and arguably a real chance to see how the recovery started off.  It is still concerning that the Claims data is so high, as that implies jobs are not coming back nearly as quickly as a V-shaped recovery would imply.  Also, remember that at the end of the month, the $600/week of additional unemployment benefits is going to disappear, unless Congress acts.  Funnily enough, that could be the catalyst to get the employment data to start to improve significantly, if they let those benefits lapse.  But that is a question far above my pay grade.

The dollar feels stretched to the downside here, and any sense of an equity market correction could easily result in a rush to havens, including the greenback.

Good luck and stay safe

Adf

A Wake of Debris

Investors are pining to see
A rebound that’s shaped like a “V”
But data of late
Could well extirpate
Those views midst a wake of debris

For everyone who remains convinced that a V-shaped recovery is the most likely outcome, recent data must be somewhat disconcerting. There is no question that June data will look better than May’s, which was substantially better than April’s, but if one takes a few steps back to gain perspective, the current situation remains dire. One of the features of most economic statistical series is that they tend to measure both monthly and annual changes. The idea is that the monthly data offer’s a picture of the latest activity while the annual data gives a view of the longer-term trend. The problem for the bulls to overcome right now is that while June’s monthly data is showing record-breaking monthly gains, the annual numbers remain horrific. This morning’s German IP data is a perfect example of the situation. While this was actually data from May, it is the latest reading. During the month, Industrial Production rose 7.8%, the largest monthly gain on record, and arguably good news. Alas, expectations were for an even greater 11.1% rebound, and more importantly, the annual data showed a still terrible 19.3% decline from 2019’s levels. So, while there is no question that May’s numbers were an improvement over April’s, it is hardly sounding an all-clear signal.

This has been the pattern we have seen consistently for the past two months and is likely to continue to be the case for quite a while. Ergo, it is fair to state that the economy is rebounding from its worst levels, but to imply that things are even approaching the pre-Covid economy is completely erroneous. This is especially so in the survey data, which, if you recall, simply asks if this month was better than last. We saw some incredible PMI data at the nadir, with readings in the low teens and even single digits in a few countries, indicating that more than 80% of respondents saw things decline from the previous month. As such, it is no surprise that things got better from there, but does a rebound to a reading above 50 on a monthly series, with no annual analog, actually mean the same thing today as it did in January? I contend it is not a reasonable comparison and to imply that the economy is doing anything but slowly climbing back from a historic decline is just plain wrong.

The European Commission clearly understands this issue as they reduced their outlook for the EU’s economic growth in 2020 by a full percentage point to -8.7%, with most member nations seeing a substantial downgrade. A key reason for this downgrade has been the recent uptick in infections and the sporadic second closures of areas within the economies. The second wave of infections is dreaded for exactly this reason, it is preventing economies around the world from gaining growth momentum, something that comes as confidence builds that things will get better. Every interruption just extends the timeline for a full recovery, a prospect that none of us welcome. Alas, it appears that the most likely outcome right now is a very slow, drawn out recovery with a continued high rate of unemployment and ongoing fiscal and monetary support abetting every economy on the planet while simultaneously preventing markets from clearing and thus insuring slower growth ahead when it finally returns.

With that as preamble, a look at today’s markets shows essentially a full reversal from yesterday’s price action. Yesterday was always a bit odd as there was no clear rationale for the risk rally, yet there it was, around the world. However, this morning, the data continues to demonstrate just how far things are from the pre-Covid world, and it seems the risk bulls are having a tougher time. Starting in Asia, we saw weakness in Japan (-0.45%) and Hong Kong (-1.4% and long overdue given what is happening there) although Shanghai (+0.4%) has managed to keep the positive momentum going for yet another day. While there were no articles exhorting share ownership in the papers there last night, it remains a key feature of the Chinese government’s strategy, encourage individuals to buy stocks to support both markets and confidence. We shall see how long it can continue. European bourses have reversed much of yesterday’s gains as well, down a bit more than 1.0% on average and US futures are trading at similar levels, -1.0%. Bond markets continue to prove to be irrelevant at this stage, no longer seen as haven assets given the fact that there is no yield available but unwilling to be sold by traders as central banks have promised to buy them all if they deem it necessary. So, for the time being, it is extremely difficult to gain any credible price signals from these markets.

Commodity markets are under a bit of pressure, with oil prices lower by 1.5% and gold falling 0.5%, while the dollar is today’s big winner. Yesterday it fell against all its G10 counterparts and most EMG ones as well. This morning, it is just the opposite, with only the pound, essentially unchanged on the day, not declining while AUD and NOK lead the way lower with 0.55% and 0.45% declines respectively. The data situation continues to show that the early signs of a rebound are leveling off, so investing based on a brighter outlook is not in the cards.

In the EMG space, MXN is today’s big loser, down 1.25%, but here, too, it is nearly universal as only IDR (+0.35%) has managed to eke out a gain, ostensibly on the back of views that the central bank’s debt monetization plan will draw inward investment. We shall see.

On the data front, yesterday’s ISM Non-Manufacturing number was a much better than expected 57.1, but as I discuss above, I don’t believe that is indicative of growth so much as a rebound from the worst conditions in the series history. This morning we only see the JOLTS Job Openings data, (exp 4.5M), but this is a delayed number as it represents May openings. Remember, too, this is down from more than 7.5M in early 2019 and 7.0M earlier this year.

Yesterday we heard from Atlanta Fed President Bostic who sounded a warning that the second wave, if it expands, would have a significantly detrimental impact on the US economy, and thus he was quite concerned with the future trajectory of growth. Remember, it is the Atlanta Fed that calculates the widely watched GDPNow number, which is currently reading an extremely precise -35.18% decline for Q2. It is no surprise he is worried.

Overall, risk is on the back foot today and appears set to continue this move. Barring some overly upbeat commentary from the White House, something that is always possible on a down day, I expect the dollar to drift slightly higher from here.

Good luck and stay safe
Adf

 

Overthrow

Health data are starting to show
A second wave might overthrow
The rebound we’ve seen
From Covid-19
Which clearly will cause growth to slow

Risk is under pressure this morning as market participants continue to read the headlines regarding the rising rate of Covid infections in some of the largest US states, as well as throughout a number of emerging market nations. While this is concerning, in and of itself, it has been made more so by the fact that virtually every government official has warned that a second wave will undermine the progress that has been made with respect to the economic rebound worldwide. However, what seems to be clear is that more than three months into a series of government ordered shut downs that have resulted in $trillions of economic damage around the world, people in many places have decided that the risk from the virus is not as great as the risk to their personal economic well-being.

And that is the crux of the matter everywhere. Just how long can governments continue to impose restrictions on people without a wholesale rebellion? After all, there have been many missteps by governments everywhere, from initially downplaying the impact of the virus to moving to virtual marital law, with early prognostications vastly overstating the fatality rate of the virus and seemingly designed simply to sow panic and exert government control. It cannot be surprising that at some point, people around the world decided to take matters into their own hands, which means they are no longer willing to adhere to government rules.

The problem for markets, especially the equity markets, is that their recovery seems to be based on the idea that not only is a recovery right around the corner, but that economies are going to recoup all of their pandemic related losses and go right back to trend activity. Thus, a second wave interferes with that narrative. As evidence starts to grow that the caseload is no longer shrinking, but instead is growing rapidly, and that governments are back to shutting down economic activity again, those rosy forecasts for a sharp rebound are harder and harder to justify. And this is why we have seen the equity market rebound stumble for the past three weeks. In that time, we have seen twice as many down sessions as up sessions and the net result has been a 5.5% decline in the S&P500, with similar declines elsewhere.

So, what comes next? It is very hard to read the news about the growing list of bankruptcies as well as the significant write-downs of asset values and order cancelations without seeing the bear case. The ongoing dichotomy between the stock market rally and the economic distress remains very hard to justify in the long run. Of course, opposing the real economic news is the cabal of global central banks, who are doing everything they can think of collectively, to keep markets in functioning order and hoping that, if markets don’t panic, the economy can find its footing. This is what has brought us ZIRP, NIRP and QE with all its variations on which assets central banks can purchase. Alas, if central bankers really believe that markets are functioning ‘normally’ after $trillions of interference, that is a sad commentary on those central bankers’ understanding of how markets function, or at least have functioned historically. But the one thing on which we can count is that there is virtually no chance that any central bank will pull back from its current policy stance. And so, that dichotomy is going to have to resolve itself despite central bank actions. That, my friends, will be even more painful, I can assure you.

So, on a day with ordinary news flow, like today, we find ourselves in a risk-off frame of mind. Yesterday’s US equity rally was followed with modest strength in Asia. This was helped by Chinese PMI data which showed that the rebound there was continuing (Mfg PMI 50.9, Non-mfg PMI 54.4), although weakness in both Japanese ( higher Jobless Rate and weaker housing data) and South Korean (IP -9.6% Y/Y) data detracted from the recovery story. Of course, as we continue to see everywhere, weak data means ongoing central bank largesse, which at this point still leads to equity market support.

Europe, on the other hand, has not seen the same boost as equity markets there are mostly lower, although the DAX (+0.4%) and CAC (+0.2%) are the two exceptions to the rule. UK data has been the most prevalent with final Q1 GDP readings getting revised a bit lower (-2.2% Q/Q from -2.0%) while every other sub-metric was slightly worse as well. Meanwhile, PM Johnson is scrambling to present a coherent plan to support the nation fiscally until the Covid threat passes, although on that score, he is not doing all that well. And we cannot forget Brexit, where today’s passage without an extension deal means that December 31, 2020 is the ultimate line in the sand. It cannot be a surprise that the pound has been the worst performing G10 currency over the past week and month, having ceded 2.0% since last Tuesday. With the BOE seriously considering NIRP, the pound literally has nothing going for it in the short run. Awful economic activity, questionable government response to Covid and now NIRP on the horizon. If you are expecting to receive pounds in the near future, sell them now!

Away from the pound, which is down 0.3% today, NOK (-0.6%) is the worst performer in the G10, and that is really a result of, not only oil’s modest price decline (-1.3%), but more importantly the news that Royal Dutch Shell is writing down $22 billion of assets, a move similar to what we have seen from the other majors (BP and Exxon) and an indication that the future value (not just its price) of oil is likely to be greatly diminished. While we are still a long way from the end of the internal combustion engine, the value proposition is changing. And this speaks to just how hard it is to have an economic recovery if one of the largest industries that was adding significant value to the global economy is being downgraded. What is going to take its place?

The oil story is confirmed in the EMG space as RUB is the clear underperformer today, down 1.4% as Russia is far more reliant on oil than even Norway. However, elsewhere in the EMG bloc, virtually the entire space is under pressure to a much more limited extent. The thing is, if we start to see risk discarded and equity markets come under further pressure, these currencies are going to extend their declines.

This morning’s US data is second tier, with Case Shiller Home Prices (exp +3.8%), Chicago PMI (45.0) and Consumer Confidence (91.4). The latter two remain far below their pre-covid levels and likely have quite some time before they can return to those levels. Meantime, Fed speakers are out in force today, led by Chair Powell speaking before a Congressional panel alongside Treasury Secretary Mnuchin. His pre-released opening remarks harp on the risk of a second wave as well as the uncertainty over the future trajectory of growth because of that. As well, he continues to promise the Fed will do whatever is necessary to support the economy. And in truth, we have continued to hear that message from every single Fed speaker for the past two months’ at least. What we know for sure is that the Fed is not going to change its tune anytime soon.

For today, unless Powell describes yet another new program, if he remains in his mode of warning of disaster unless the government does more, it is hard to see how investors get excited. Risk is currently on the back foot and I see nothing to change that view today.

Good luck and stay safe
Adf