Trading Strategies – 21 August 2020 - Doo Prime News
Doo Prime News > Important Notice > Trading Strategies – 21 August 2020

Stocks continue to thrive on bad data as US jobless claims disappoint again. NASDAQ closed up 1% and Asian markets are all higher into the weekend. The USD fell back from a brief rally and I added to EUR longs on a resting order at 1.1810. But I am keeping a tight stop as the tech set-up seem to be suggesting some exhaustion in the EUR rally. I am also surprised that EURGBP is not higher as Brexit trade talks seem to be going nowhere but Retail sales showed a decent bounce this morning.. Barnier has a press conference scheduled for 10am London time. Rising stocks capped the EURAUD move as well. But the basics behind the lower USD and higher gold have not gone away and after some consolidation, I think the USD resumes its downtrend. One point to note as stocks rise is that volumes are collapsing; is this rally running on fumes? Preliminary PMIs through the day may make it an interesting finish to the week and it’s a Friday so, “Be careful out there”…

Keep the Faith..

Details 21/08/20

Stocks still like bad news as Claims disappoint; USD back down:

It appears that US stocks still love to hear bad news as I guess it means the Fed will keep the pedal to the floor with monetary policies but we have to consider just how much damage long term high unemployment will do to the US and indeed many other economies. Stocks drifted higher after the data and the USD seems to have started to resume its downtrend and I managed to add to the long EUR position at 1.1810 on a resting order.

I am keeping a tight stop on this position though as we seem to be losing some upside momentum in EUR as the Bollinger bands start to narrow and the MACD has crossed below its ma and I would be far more comfortable if we break back above 1.1925. But the fundamentals surrounding a weaker USD, Fed policies, have not changed but the market is still rather long. Staying with FX, I am little surprised still at GBP strength, especially against the EUR with no sign that Brexit trade talks are nearing a positive conclusion. Also, the rise in equities has topped the EURAUD trade out again and remains stuck in its rather frustrating range.

Weekly jobless claims data was poor and I am not sure that companies, who will be cost cutting, will be prepared to take back furloughed staff for long and I am also pretty sure that wages are not going to go up for some time. This will keep the deflationary pressure on. 1.106 million Americans filed for jobless benefits last week and up notably from the 971k (revised higher) last week, and notably worse than the 920k expected.

PPP rolled off recently and I do wonder if claims may have actually based already. Also Philly Fed data disappointed again suggesting the recovery in the regional factory sector eased this month, echoing the findings of a similar report by the New York Fed published on Monday. Continuing claims were a little better though but we still wait for a further bailout package from Congress. This saw equities turn higher and many in the “big5” saw 2% gains and Apple closed with a $2trln cap. Some good news was seen as it was suggested that US and China may now hold a call on trade issues according to a Chinese spokesperson. The Trump administration was set to review trade purchases with the Chinese last weekend, but that fell through. By Tuesday, President Trump said he delayed the talks because he was displeased by China’s handling of the virus pandemic.

Drilling down into the Jobless claims data it seems we still have some discrepancies, as we did a few weeks back. Data chaos of the labour market continues with the two government data providers wildly contradicting each other: The weekly unemployment insurance report yesterday from the Labour Department, which shows a still catastrophic situation of over 28 million people claiming unemployment insurance under all programs; and the monthly jobs report by the Bureau of Labour Statistics which asserted that in July, there were only 16.8 million unemployed. There is still no clarity. But we know the labour market is still in terrible condition though the peak of the unemployment crisis is likely in the past. But the increase in both federal and state initial claims is a disconcerting factor. But again, the Fed is still impacting markets. Total assets on the Fed’s balance sheet for the week ended August 19, released yesterday afternoon, rose by $53 billion, to $7.01 trillion, the second week in a row of increases, after two weeks in a row of declines. Total assets are now down by $158 billion from their peak on June 10. The USD debasement is set to continue and while the USD may consolidate for a time, the trend looks likely to continue in my view. Under the Fed’s asset purchase program, the wealth of America’s 600-plus billionaires ballooned by $434 billion, to $3.4 trillion, while over 30 million people lost their jobs. Hmmm.

It seems to me that the demand for USD’s has dropped as central banks roll back dollar lending programmes. Four of the world’s leading central banks have further scaled back the US dollar liquidity they offer via emergency swap lines with the Federal Reserve. Is this an illustration of the global financial system’s recovery from the market panic caused by coronavirus earlier this year? I am not sure and it may be temporary and reappear at quarter or month end.

The ECB, BoE, BoJ and the SNB said they would offer s/t dollar funding just once a week now instead of 3 times a week. Since its peak in March the dollar has fallen about 12 per cent against a trade-weighted basket of currencies, according to Bloomberg, and it has slumped to its weakest level since 2018 against the EUR.

Brexit talks still seem to be stalled and going nowhere but there is talk that Britain has tabled a draft FTA with the EU to try unblock stalled negotiations; The Times understands David Frost handed over a consolidated legal text at a private dinner in Brussels this week which is regarded by EU officials as a desperate move. I still think there may be some irreconcilable differences that may kill this deal but I think the UK needs to give a little as the economy is not going to take a hit from no deal at all well and is weak into this. Barnier has a press conference scheduled for 10am this morning after having breakfast with Frost. Meanwhile, Birmingham police & officials warned they need to act now to avoid a city lockdown in the wake of positive C-19 tests increasing by 27% in a week to their highest level since mid-June: This won’t help and to me GBP strength seems a little strange. I am sticking with the long EURGBP recommendation but the cross is stuck and techs turning down.

The mid-point ma is now turning lower, the MACD is below zero and below its ma and we are at the lower band now but I have a tight stop here (see below). Data last night showed August GSK consumer confidence falling once again to -27after -25 expected. However, UK Retail sales spiked far higher than expectations this morning but coming off a very low base it has to be said. They came in at 3.4% after expectations of 2% mom. But interestingly, EURGBP did not move much (maybe because this data is now released before UK bond markets open which is ludicrous).

One note of warning; Equities maybe higher but we have a problem here; they are running on fumes as volumes collapsed and volumes across almost all products are way below historic seasonal averages. Which is bizarre because this is on the back of the highest volume Jan-to-July we have seen since 2010 (except single name options where volumes were the worst Jan-July since 2010). The exaggerated August drop in liquidity (leading to higher impact costs) is driven by large amount of trading earlier in the year with equities all the way back to the highs and the recent high levels in vols. Interestingly, volumes are far lower in futures than cash.

But stocks still seem to like bad news as it keeps the Fed in play. On that, we have Jackson Hole next week where instead of meetings behind closed doors, this year will be virtual and live with Jay Powell appearing on Thursday. Could be an interesting week, especially with volumes so low.

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Strategy:

Macro:.

Long EURGBP @ .9030.. Stop at .8950ish.

Long Gold @ $1875 Stop at $1875

Long EURJPY ´126.00 Stop at 125.10.

Long EURAUD @ 16515 Added at 1.6420 and Stop below 1.6235.

Long EUR @ 1.1876 Added at 1.1810 and Stop at 1.1780

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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