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Trading Strategies – 07 July 2020


Good morning.. Another 1.5% rally in Shanghai stocks but the rest of Asia was not so rosy but this move in China is solely based on a Chinese media-led hype. I do wonder what is behind this but there is a suggestion that China is concerned about a shortage of much needed inflows of foreign dollars and are trying to make Chinese stocks an attractive investment for foreign investors. These recent moves should not really be impacting western markets but the NASDAQ made a new all-time high again yesterday!! The USD is mixed with some weakness in AUD after lockdowns put in place in Melbourne. Japanese data was ugly yet again and with the JPY no longer correlated to risk or USTs, I just wonder why it is not at 115.00!! Maybe it is time for the JPY to tart reflecting the economic reality/carnage of its current state. Maybe some cheap downside JPY options are the play while we wait for investors to wake up to the reality that is unfolding in Japan. I am sticking with my EUR call and I am adding EURAUD to the bullish call here at 1.6250 but with a tight stop at 1.6080. S&P is still in a range and rotation into techs continues. No data of note but US JOLTS always worth a look.

Keep the Faith..

Details 07/07/20

The global liquidity surge keeps stocks from falling: Why is UDSDJPY not at 115.00?

US Tech stocks again came to the rescue yesterday as the NASDAQ made another all time high and where Amazon topped the $3000 mark for the first time and Tesla topped 1,300! This on the back of a belief that global liquidity, pumped in by the central banks, will keep the demand in place. US data also helped but was so strong that for a while stocks started to fall as fears were that the liquidity may not be needed in such quantity and it is a fair point looking at the beat in Services PMI (a final read) and the ISM non-manufacturing data, which was a stunning beat.

In the ISM components I noted that the Business activity reading (chart above) was the highest since early 2011, while the gauge of new orders climbed nearly 20 points to a four-month high of 61.6. But PMIs are peculiar creatures, especially after a shock like we just had as the economy was mothballed. They don’t measure activity in dollars. The surveys ask executives how various aspects of their business changed in the current month compared to the prior month: up, down, or no change. There are no dollars or other quantity measures involved; just a Q&A on whether things have improved. Of course they have, as the previous month was a stinker. Interestingly, both PMIs showed that employment did not bottom out in May and that employers continued to shed jobs in June, but they shed jobs at a slower pace; that is the key takeaway for me and the Claims data is still climbing.

Equities seem a bit unsure of themselves up here and I am not surprised as this rally on Monday was based on China pushing retail accounts into buying Chinese equities; all it was, was a state media-led rally if you will.

My chart of the S&P (above) suggests to me that more sideways action within the established range is likely with narrowing outer bands and a flat MACD. I think there was more rotation seen into tech yesterday as well. Back in China, the rally has seen a 13% move higher in just a week! But in the US, we still have this uncertainty over the sustainability of the economy against the powerful liquidity injections by the Fed. But for the US economy to really take hold, they need another fiscal bill passed and soon. No new $1trln package and all bets are off as far as I am concerned and I think a lot of the upbeat forecasts on the US economy are pricing in a new package which is yet to materialise. These are temporary props and if the temporary props, such as the $600 a week to the unemployed, stimulus cheques, the Payroll Protection Program (PPP), and aid to State and local governments, come to an end, look out below. If they extend them; how long can they last, especially if unemployment remains high?

Overnight, even though Chinese stocks were up yet again more than 1.5%, Japanese shares fell, as even with all the stimulus the BoJ and Abe’s government have thrown at this crippled economy, official data showed that wage growth in the country continued to weaken in May. With the JPY no longer correlated to risk moves, I think it is about time JPY started to trade back to reflecting the economic outlook in Japan. On that basis, USDJPY should be at 115.00. The economy really is shockingly weak and has been for a very long time; so why is USDJPY still here? I am thinking a steep fall in the JPY maybe overdue against many currencies but at present it is quite clear USDJPY is going nowhere and I think many have given up trading it.

With narrowing bands and a flat MACD we may see more sideways action but taking a step back, the JPY is overdue to start reflecting its economic weakness. I am hoping the markets will seize upon this JPY strength and act but for now a cheap option play may be the best bet to reflect a weaker JPY position. Japanese May Average Cash earnings came in at a measly -2.1% y/y vs -0.7% prev and May Household Spending was shockingly weak coming in at -0.1% m/m vs 1.8% cons & -16.2% y/y vs -12.2% cons; fastest decline since comparable data began in 2001. Forecasters were very aware that May was going to be weak but this is still a shock and we still see zero growth and no inflation. And yet central banks like the Fed, ECB and BoE seem happy to follow the Japanese monetary policy template. Why?

Through the day we did see the USD weaken and EUR strength saw the EUR trade just shy of the range resistance at 1.1348 and EURGBP found some demand again. In fact, the EUR was bid all day until the US data topped it out against the USD. I think there was a growing belief that the EU economy was in better shape than the US to emerge from the crisis and the strong US data dented that thought. But I think it may yet be the case and I am sticking with my 1.1500 EUR call and if the JPY does weaken, we could see EURJPY spike higher at some point. As far as EURUSD goes, we still need to close above 1.1348 for a test of 1.1420 and then 1.1497 but I think it is coming. The US virus data was skewed down by the usual weekend reports where recording is less vigorously attended to. I am adding EURAUD to the long recommendation here at 1.6250.

Last night we saw AUD break lower and I think that was due to the fact that Australia’s second-most populous state announced a six-week lockdown across metropolitan Melbourne as a coronavirus outbreak risks triggering a second wave of infections in the nation. The USD is very mixed. We are also headed into earnings season and it will be interesting to see the impact on financials with zero US rates. But as far as many earnings are concerned, we are flying blind into this season. On a risk reward basis, it does seem rather high-risk chasing stocks up here and I am still of the view that we play the range in S&P at least. I also noted that the VIX was creeping higher into the last couple of hours of US trading last night but we still managed to close near the highs, driven mainly by the NASDAQ closing up 2.2%.

A more macro view: Central banks and especially the Fed have been so active in trying to shore up markets that there are almost no risks priced. Governments and central banks now create both supply and demand. Bailouts and subsidies are handed down so that zombie corporations can produce on the one hand, while welfare, universal basic income, and other handouts are distributed so that citizens can buy the products. Strictly speaking, this is a type of socialism right at the heart of the world’s biggest, free and capitalist market. This tiny virus has seen/forced the ECB asset purchase program to currently stand just shy of €3 trillion. That is excluding its newly expanded €1.35 trillion Pandemic Emergency Purchase Program—equivalent to the entire GDP of Spain and considerably higher than that of the Netherlands. A big show was made of the Trump administration’s $4.5 trillion relief bill and the Fed’s $2.3 trillion program to “bolster” the economy. The G7 central banks have racked up asset purchases of $1.64 trillion in March and expect to top out at $6 trillion when all is said and done. Welfare and unemployment cheques now pay more than salaries in many cases; what we have now is more akin to what we would expect from the old Soviet Union or China! Socialism is spreading across the capitalist world and the very foundation of capitalism is being eroded by our own central banks.

The US bond market is rapidly turning Japanese and that is a concern as the JGB market is a busted market now.

Bond yields are converging on zero and that has connotations for us all, including the Fed. Clearly reducing rates from current levels will have a minimal impact if the slowdown extends and we know that while the Fed may come back to expanding the balance sheet, it does nothing to spur growth, as indeed we have clearly witnessed in Japan and the EU. All it does is keep asset markets up and does nothing for those on Main Street. As far as the real economy is concerned, the central banks are done. The Fed is now looking at other options and is already again following Japan’s lead. The Fed and its peers will have no choice going forward but to start buying other assets like stocks and real estate (and junk bonds, which for some inexplicable reason the Fed is already buying). Do we really want socialised markets?

The longer-term damage is larger than many may believe, for economic growth is driven by capital investments, entrepreneurship, and innovation. These form the basic pillars of growing, stable, and sustainable economies. When capital investments and entrepreneurship are suffocated, innovation and progress are stifled. The US could fall far behind on the global stage in coming years and the USD dominance challenged. Of course the US will fight tooth and nail against this but they are already being caught by China, where innovation and education are promoted. We all need a vibrant and heathy global economy but here the threat is real and present with globalisation and capitalism at some risk but can we all make do without China’s massive consumer base? Of course not but Trump is trying to back away. In an interventionist economy, like we now have in the US, good money, and by extension good investment, is driven out by the “bad money” injected through perpetual interventions. With current levels of monetary easing and deficit spending running into trillions across the globe, productive savings are essentially drowned out. The vast majority will be looking for hand-outs and will probably get them as these are populist governments we have now. We rely heavily on our central banks to deliver us from this crisis but I do wonder where these monetary experiments are taking us. To a better place? I doubt that very much in the long run.

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Strategy:

Macro:.

Long EUR @ 1.1210.. Stop at 1.1150

Long EURAUD ´1.6250 Stop at 1.6080

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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