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.. Mixed Asian markets overnight but the USD and Gold were certainly moving. Gold has busted back above $2000 (trading at $2005 as I speak and is up 1% on the session already) and the EUR heavy DXY is back on recent lows at 92.55. I personally think both resume recent trends; in opposite directions and I maintain the long position in gold but have moved the stop up to entry level at $1875. The trouble is that USDJPY is getting caught in this and EURJPY is suffering but I will leave my stop in place but it seems I may have missed the dip in EUR as it breaks back above 1.1900. No fear in US stocks still and NASDAQ closed up another 1% yesterday but the broader markets just beginning to struggle in the summer doldrums and we may start to establish a double top in S&P (or bust out to a new high close). As it’s quiet, I have written a more macro piece as recommendations all remain the same. No data of note apart from US Housing starts later. All eyes on the USD again..
Keep the Faith.
Hope springs eternal: A macro look at things as it is rather quiet and I am sure you have time on your hands for a spot of reading:
Yesterday saw some of the lowest volumes traded in US stocks since May 2006 but no signs of a scramble to cover longs when things go quiet. No, US stocks don’t do that anymore; they are bought on good news, bought on bad news and bought when nothing is going on; this is not supposed to happen in August. The basis for this, seems based on hope but devoid of many fundamentals and risk premia. There is a great deal of hope that a vaccine will be found soon (because Trump says so) and the infection rates will fall, while unlocking economies seems to be challenging that view at present. The vaccine is still months away at a minimum. Plus, equity investors believe that the Fed will always be there for them and be willing and able to stop a significant drop in equity markets and to be honest, this has moved to the extent that the market could be accused of holding the Fed ransom. The other big hope out there is that the US and China are just sparring while Trump gets back into the WH but the problem with that is I hear little different from the Democrats. Remember that a bill to force Chinese companies to delist from US stock exchanges if they do not open their books to US regulators was passed unanimously by the Senate in May. So, while it seems the euphoria may even keep going for a while and stocks may hit new all-time highs from here, there is a real danger that at least one of the above becomes a real threat to this cosy affair investors are enjoying with stocks.
Weekly S&P above with Bollinger bands and MACD. However, the 5-day moving average (DMA) of the Put/Call ratio, with a current reading of 0.492, is suggesting from a contrarian perspective, an overly bullish or especially complacent market, vulnerable to a reversal. Since late 2018, sub-0.60 readings in this measure have coincided with significant S&P 500 highs. Indeed, most recently, in early June, after this measure fell to a two-decade low at 0.402, the SPX promptly slid more than 8% in just five trading days. Just sayin’.
Quite simply, the US market in particular (and within that the FAANG stocks), have completely decoupled from any form of reality and a lot of this sits directly at the Fed’s door. The fact that we are entering the most damaging phase to date (the scary thing is phase3 may yet to be seen and be a lot more dangerous) in the trade wars between the US and China, should be ringing bells for global markets. This is NOT a game and I do not think it is a ruse to get Trump re-elected as I think the US is seriously concerned at the speed of the catch-up from China on the world stage. The US does NOT like communist regimes and it does not care to be challenged on the global stage either. I am not sure China was planning to compete with the US just yet but the US see this as enough of a threat to take the fight to China before they can. This will create, as I have mentioned before, a polarisation of the two biggest economies on the planet and those in the middle may have to take sides, just as we saw in the Soviet Union through the cold war back in the 1960’s through to the fall of the Berlin Wall. Sides are already being taken as the chairman of Foxconn, the largest Apple supplier and the world’s largest electronic contract manufacturer with a workforce of up to 1m in China, said last week that the company expected global technology supply chains to split into two camps: “It will be one for China and those associated with it, and another for the US and their friends.”
This polarised new world we are staring at is awful news for global trade and global peace in the longer run. With regard to what we see happening with Taiwan, I have to wonder if we are at a point where there may soon be no way back to the negotiating table. The polarisation of the two super-powers is going to do huge damage to established supply chains and possibly make goods a lot more expensive. While Trump also has issues with the EU, Canada and others, China also has issues with Australia. China has begun an anti-dumping inquiry into Australian wine imports in the latest escalation of trade tensions between the two countries that analysts warn could lead to punitive tariffs. China is the largest market for Australian wine, accounting for two-fifths of total exports in the year-to-end-June worth A$2.84bn. The potential hit to Australian producers comes at a difficult time for the industry, which has faced losses owing to bushfires, smoke taint, drought and Covid-19 over the past 12 months. Australia’s 2020 vintage is the smallest in more than a decade.
Trade wars wherever you look; how can that be good for global trade and thus, the global economy? China’s share of global exports has been hit by its trade dispute with the US and many companies (even outside of the US) are reconsidering their reliance on China as a manufacturing base. The global dependency on China is waning. That surely has quite large implications for China and the world and China is starting to look inwards to develop its tech requirements and is shifting to a more consumer-led economy. Last year, Chinese exports of 1,200 products accounted for 22 per cent of the world’s exports, 3 percentage points down on the previous year, according to a new study by Baker McKenzie, the law firm, and Silk Road Associates, an economic consultancy. For consumer goods, the country’s global market share fell by 4 percentage points to 42 per cent. The US is concerned about China becoming a major tech competitor and moves are clearly based on slowing China’s advancement down.
With that and the Fed, hell-bent on debasing the USD, the danger of a nasty return to inflation at a time of low growth is not going to make the Fed’s life easy as raising rates will have a huge impact on global markets and all the debt built up recently as someone is going to have to find a way to finance it. What if this trade war does NOT go away? Again, we may be close to it being too late. This is so much more than about trade; this is about the strategic positioning on the global stage and the way the future will be carved up and it affects us all. We are already seeing the US back away from globalisation and that in itself is of huge concern to the global economic outlook. Plus we are also seeing the emergence of geopolitical tensions around the globe. This is no coincidence and you can almost feel the seismic shift taking place in the world order. History is littered with events like this and none of them ended well.
Since President Xi Jinping took power in 2012, China has built military bases across the South China Sea, ended the autonomy of Hong Kong and imprisoned millions of Uighur Muslims in Xinjiang. Military threats to Taiwan are becoming more overt and the US is responding by selling F-16 fighters and drones to Taiwan. US jets regularly fly across the Taiwan coast. Taiwan is something of a red line not to be crossed by the US as far as China is concerned and this move by the US is provocative to say the least. China considers Taiwan a rogue province and maintains that reunification is inevitable, reserving its right to use all necessary measures, including military force. It no longer matters who is to blame for the deterioration in the relationship or who started this new cold war, the issue is, it is real and becoming more of a threat while stocks sleepwalk right into it. Can big US business stay out of this and hunker down hoping it passes? Not a chance, as politics will see them dragged into this in tit-for-tat sanctions and restrictions. The way in which we have lived so well in the last 15 years has been based on cheap goods from China and a solid and smoothly working structure of globalisation. Unfortunately, America is keen to pull all that down as it faces off against an almost worthy and capable opponent.
As far as stocks go, This Time It’s Different” may end up being the four most dangerous words uttered and we have heard them before on many occasions and the catalyst for a reversal may not be sitting in front of your face so that you can monitor it. It will be something from left field and if and when it does happen, what more can the Fed do? They may be able to buy more bonds but short of buying up huge tranches of US equities, I am not sure they could win another assault. Look at Japan, they have already done all the Fed has done and more and what do they have? No growth and no inflation (yet). I think the virus may yet be an issue and there is much more Pandemic driven grief and pain to come. But as I said earlier, central banks simply can’t afford for the sentiment crisis a major stock market crash would create. They have no choice but to continue the illusion – keeping returns repressed and inflating financial assets to unsustainable levels until the bubble bursts and burst it will at some point. Just what are our central banks creating for us? But China has recovered I hear you all scream and will pull us all out of this hole in the ground but it seems to me to be stabilising at less than 90% of pre-Covid activity – perhaps reflecting labour issues and snapped supply/demand chains and China has a debt problem too.
The opportunity to face the economic depression honestly in 2008 and 2020, through bankruptcies, write downs, and a broad financial purge (which is the way capitalism should work) came and went with the rollout of massive fiscal and monetary stimulus programs. The very structure of capitalism is being undermined by the Fed and central banks around the world as short term schemes like the CARES Act, the PPP, the PMCCF, and the SMCCF, among others are implemented. Sounds the right thing to do but at what cost? The reality is that efforts to paper over the drop off in what people and businesses earn and what they owe, could never be covered for long and the end game is getting nearer. Printing press money may appear to work in the short term but it is not without consequences. First, it destroys money that has been earned and saved and second, it turns the stock market into a barometer for the expansion of the money supply and nothing else. Yet the relationships between printing press money and the financial and economic distortions it causes are increasingly perilous.
The stock market may be the barometer for the expansion of the money supply today but tomorrow, the stock market could crash, and consumer price inflation could assume the role of money supply expansion barometer. Then we get the debt problem hit us square in the face. It sounds farcical now but is there a real danger that the US economy may be facing stagflation at some point? All that money sloshing around in financial markets will do massive damage if it ever hits its intended target; the consumer. This is the paradox of what we are seeing. The central banks originally printed money (so they say) to give the banks to lend. The trouble is there was no demand and so they stuffed it in the equity markets and made a fortune. The consumer got none of it. Why is it only now that fiscal policies are being unleashed? If we had done this earlier, the central banks would not be trapped by the markets and held at gunpoint with regard rates. The central banks and governments have made a huge mistake here and it has created a wealth inequality which may create some dreadful social unrest, as indeed we are already seeing.
The consequences of mass money debasement are impossible to undo and do not ever let someone suggest it is workable within MMT. The issue here is that once fake printing press money has mixed with the money that has been earned and saved, it cannot be backed out. The value of all dollars becomes suspect and at some point faith in the currency can be lost. What’s next? I fear it is more of the same, as seen by the BoJ, they will simply keep going. More monetary stimulus, more fiscal stimulus, more spending programs, more federal unemployment cheques, more bailouts, more government subsidised loans, more money supply, more Fed purchases of corporate bonds, more debts and thus, more deficits. But this also means more wealth inequality, more riots and more protests, which means more chaos. In the US we are already seeing this as social unrest becomes an everyday occurrence in some of the biggest cities in the country. Wealth inequality has a habit of creating change; just go ask the French. The revolution there was not just about food, it was about wealth inequality and the violence on the US streets is getting worse. This is a cancer forming in the US. Gold is up where it is for a number of reasons and the USD is falling for a very good reason too in my view. Both look likely to continue trending in my view.
Daily DXY above. Gold is loving a lower USD and I remain of the view that this is still going up but I am raising my stop to the entry level at $1875.00 (daily Gold chart below).
The only problem with the positions is that USDJPY is also impacted by the weaker USD but I feel the stop is in the correct place as I may need to move to a short USD view again and give up on some of the crosses.
Long EURGBP @ .9030.. Stop at .8950ish.
Long Gold @ $1875 Stop at $1875
Long EURJPY ´126.00 Stop at 125.10.
Long EURAUD @ 16515 looking to add at 1.6420 and Stop below 1.6235.
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