Good morning.. I wanted to get this out early as Bond markets are getting smashed. The world’s governments are embracing MMT and massive stimulus packages are being unveiled. I guess they are trying to bridge the economy while we get through this ...
Good Morning.. A weak close on Wall St despite another late rally into the close and Asia had a weak session and the USD held and extended gains. Aussie unemployment was dreadful and the PM suggested worse to come. Powell batted away all suggestions of NIRP for now, so if the economy does take as long as he suggested it will to recover, they will be back with more QE. I was not surprised at all to see stocks fall and the USD rise after his comments and I think the USD is about to move higher still. I remain bearish GBP and AUDJPY and still think the EUR could fall here. I am waiting for a bounce to sell. AUD will respond badly as Trump keeps prodding the Tiger and I am struggling to see where the global recovery will come from as I think China is still very weak and that impacts the EU recovery too. I know I sound like a broken record but what on earth are stocks doing up here? US weekly jobless claims again today and surely this unravelling disaster is an issue for global markets. The longer this goes on the more these data will matter. The Fed has clearly stated there is no V-shaped recovery coming so I think some big adjustments are needed as sentiment is about to take a hit.
Keep the Faith..
Stocks slide as Powell says no NIRP and Trump continues to prod the Tiger: Can the Fed keep tapering bond purchases?
Stocks fell into the US close again last night (before its customary last-minute rally) and to be honest, I have no idea why on earth they rallied after the Powell comments. There was no sign that the Fed is ever going negative with rates and to me, as soon as he said that, I felt the USD would rally and stocks fall, as they are done with monetary policy for now. The Fed has played a strong and swift hand and unless they want to follow the BoJ, then the government is going to have to take up the slack. The DXY moved back above 100.25 but for the USD to really pop I think we need to get back above 100.80 but its coming in my view and I remain bearish Cable and AUDJPY. I also think there is a significant chance that EUR hits 1.0500 at some point as I think stocks are in for a very rocky ride now but as ever, we need the top 5 to wobble. Just as Powell said additional fiscal stimulus may be “worth it” to shield the US economy from long-term damage due to the pandemic, Angel Gurría, OECD secretary-general, warned that rising debt levels would “come back to haunt us” and they probably will but no one cares as most will be gone from office by then. How much more than $3trln do they need? If that is not a warning to equity investors, I don’t know what is.
S&P seems to be making its mind up here but I think the next move may be down hard.
Cable broke support at 1.2247 and to me this suggests we may be seeing the start of a new leg lower. I think we may have a double top in place up at 1.2645ish and all we need is a break of 1.2160 and a look at sub 1.2000 cannot be ruled out.
EUR is also on the back foot to some degree but is yet to break support at 1.0727. But a German constitutional court judge has spoken about its recent controversial ruling, stating the ECB isn’t “Master of the Universe”. Does that sound like a judicial retreat to you? In response, the ECB’s Chief Economist has stated that its asset buying is “proportionate” and will end “as soon as the inflation aim is reached.” Ha, I am sorry but to anyone looking at the BoJ, that will immediately set off alarm bells, as it implies it will never stop – and I would assume the German judges are quite capable of looking at Japan as an example. But for me, the USD is about to push higher and that offers all sorts of problems in the EM space and for risk assets in general. Powell justified the need for further government policy action in the US based on evidence that “deeper and longer recessions” tended to leave “lasting damage to the productive capacity of the economy” — and the US risked an “extended period of low productivity growth and stagnant incomes”. Does that sound like a V-shaped recovery to you? No, nor me. What an earth are stocks doing up here?
Powell suggested a staggering and indeed sobering statistic, that of all those earning less than $40k a year in the US, 40% had lost their jobs! To help offset lost wage income, Congress, amongst other actions, sent out one-off stimulus cheques to households. Of those who received the cheques, most planned to spend it on necessary items: bills, debt, or food and groceries. Then what? Even as some stocks rallied yesterday the banks were getting hit again and the top 5 concentration in the US now is getting very concerning. According to a report from BofA’s economist team, the bank’s US Consumer confidence index (USCCI) dropped from 43.4 to a new low of 42.8 on May 11. The details show that consumers are increasingly pessimistic on the current outlook, as the current conditions index fell from 36.0 to 34.5, while the expectations index increased from 50.8 to 51.1. The consumer is in bad shape and nothing is going to change that for a while; unless we get a vaccine sorted soon which seems highly unlikely and luxuries are going to have to wait.
On top of all this we have Trump preparing to go after China again and it seems relations are about to take a turn for the worse. There is a story circulating that the US Senate is set for action as soon as this week on approval of a bill that would impose US sanctions on Chinese individuals seen as responsible for human rights abuses in Xinjiang. The Senate has already unanimously passed a first reading of a version of The Uyghur Human Rights Policy Act 2019, and the House passed a stronger form in September. We are hence edging closer to it taking a veto from Trump to avoid it becoming law. Furthermore, the AFP reports another group of Republican senators has proposed The COVID-19 Accountability Act, which if passed will give Trump 60 days to certify to Congress that China has provided a full accounting to an independent body, such as the UN, of what happened with this virus, has closed all its highest-risk wet markets and has released all Hong Kong activists arrested recently. Failure to do so would authorise Trump to impose sanctions such as an asset freeze, travel bans, visa revocations, and to restrict Chinese businesses’ access to the US banking system and capital markets. (And we are once again back to the Eurodollar weapon given that would mean an inability for China to access USD if so.) There may not be much push back for these bills and if so, China WILL react.
This escalation comes at a bad time and follows the oil crisis and I am not sure stocks can take another hit. Trump seems determined to prod the Tiger and I am pretty sure the Tiger will respond and that is not good news for the likes of AUD. I think AUD looks rather high with this building in the background. AUD daily below and we are sitting bang on the mid-point in the Bollinger band. A sustained break will send us back towards the lows and a look at .6255 seems possible.
Trump is looking for political cover into the election and needs a scapegoat; China seems to the chosen one. Trump is also reportedly extending the executive order aimed at Huawei and ZTE on protecting US supply chains for an additional year just to rub salt into the wound. Is this the beginning of a long running cold war developing? If it is, it is negative for risk. I would keep an eye on a weakening CNH over the next few days as China is mulling punitive countermeasures on US over COVID-19 lawsuits. The Trade war is about to make an untimely resurgence. I am still sticking to my 20% sell-off at some point in S&P from recent highs of the bounce off the lows. We have no idea of the duration of this slowdown and it may get a lot worse before it gets better but there is not much more central banks can do and governments cannot support all businesses and individuals for long. The clock is ticking and who knows, this recession may yet be worse than 2008; we simply do not know yet. My view is that buying stocks here is gambling and not investing.
I keep hearing economists trying to figure out if this crisis is going to be like 2008 or 200 or 1987 or even 1929 but the reality is it could be any of those or worse; we simply do not know and we do not yet have a vaccine, with growing evidence that unlocking is creating further rises in infections. The speed of this slowdown, a self-inflicted coma, is what really worries me and the time it has taken to strike the unemployed. After October 1929, the stock market fell 90% and unemployment hit 24% but that took three years to fully play out, until 1932.We have never had an enforced closure of most of the global economy so how on earth can we compare these crises. The world is staring at record job losses and Australia joined this dreadful club last night with record losses that the PM suggested would get worse. Just how many job losses are temporary?
Guesswork is all we have. In this collapse the US stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks. Remember that this crisis hits with rates already low and in some cases already negative with excessive debt, defaults, declining demographics, deflation, currency debasement and de-globalization. I think equity investors seem to have forgotten that but how can it not matter and how can in not suggest that this crisis could be right up there with the worst seen. The starting point was pretty dreadful for most economies and looking around, I am failing to see the shining light that could pull us out of this, especially if we are heading back into a trade war or some form of cold war between the US and China.
This is exactly why Powell suggested the Fed see a very slow recovery with further shocks and they sent a pretty clear message that we are facing an epic struggle ahead. The issue here is economists are so reliant on models now that they seem lost without them and in these circumstances, they are rendered useless. Businesses will take a long time to get back to profit and that means zero thoughts of spending or expansion for months to come as cost cutting is the first priority for those that survive. Some will find no jobs to go back to and the notion of most returning to work soon appears naïve. Deficit spending will not “stimulate” the economy as the recipients of the spending will pay bills or save money and while the Fed can provide liquidity and keep the lights on in the financial system, it cannot cure insolvency or prevent bankruptcies. There is a danger here that this process will feed on itself expressed as deflation, which will encourage even more savings and discourage consumption. Are we in a deflationary and debt feedback loop that has only just begun?
So, if negative rates are off the table then that only means more QE but right now the Fed is tapering purchases. Just how big will the Fed’s balance sheet need to go? There is a danger that the answer is a lot bigger and that comes with a few problems if negative rates are off the table (for now). As crazy as it may sound, despite the Fed’s massive liquidity injection to date which has pushed the Fed’s balance sheet from $4.2 trillion to $6.7 trillion since mid-March, it is not enough and to ensure that the problem of the -1% r* (the neutral rate of interest-estimate) is addressed without cutting rates negative – a problem which is now manifesting itself in a chronically high dollar, i.e., dollar shortage, which has failed to normalize back to pre-crisis levels as shown below.
The Fed may have little option but to keep buying Treasuries and I am not surprised with the issuance that is due. Remember that last Friday the Fed cut its daily POMO average to just $7 billion from $75 billion two months ago, the deluge of more Treasury supply will ultimately push rates higher and the USD up.
Last Friday the Fed cut its daily POMO average to just $7 billion from $75 billion two months ago; the deluge of more Treasury supply will ultimately push rates higher. There are $79 billion CMBs settling today and $39 net new Treasury’s settling on Friday for the refunding. But that’s just the start. All total, there are $689 billion net new Treasury’s settling during the month of May and $992 billion net new Treasury’s settling between now and June 15th.
Short AUDJPY @ 69.25 added at 68.25 and Stop at 70.25 recent high.
Short GBPUSD @ 1.2335.. Add at 1.2415 Stop above 1. 2500
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