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.. Quite a move in the USD last night, especially in the Asian session where we saw no news of note and equities hardly moved. I am scrambling around to find out why this move happened last night. Maybe it is a growing belief that the US is now looking less likely to emerge strongly from the crisis anytime soon. I think that view is correct but we already knew that. Comments from Ray Dalio of Bridgewater may have impacted. But we have had a growing shift in sentiment towards the USD for a while and I have been bullish the EUR and a couple of its crosses for a while now but this was a very broad move lower in the USD last night. The US/China trade spat is entering phase2 and will be far more damaging and the US is seemingly pushing back against globalisation and that will delay any recovery. But I do think there is a positive shift towards the EUR and its bond market now and that may still see EUR outperformance in all this and the surge in precious metals is also a signal of alternative investment. A significant move lower in the USD seems very possible still. German IFO and US Durable goods data maybe worth a look today..
Keep the Faith..
The USD suffers an identity crisis:
The USD is really starting to accelerate lower and the fact that we see an extension of the move in Asia is a little concerning. The first thing I looked at when I saw the prices on my screen this morning was USDCNH, thinking maybe China had done something with the Yuan but no. It is unusual to walk into a broad and significant move down in Asia, especially on a Monday morning when equity markets hardly moved, and so I looked for some major news from the US but again, the move seems to be driven by investors possibly starting to question the ability of the US economy to recover and the very role of the USD on the global stage and fund manager Ray Dalio comments may be partly to blame. The founder of Bridgewater Associates laid out a scenario for the next clash between the US and China, based on measures he said are within the realm of possibility.
He also warned that loose fiscal policy and ideological divisions are pushing the U.S. into decline. There is a real danger here, in my view, that the EUR and possibly even gold, which also roared higher, are seen now as significant alternatives to the USD, especially the EUR and its bond markets since the commitment on the joint bond venture. I have been bullish the EUR for a while and still see this higher over time but some profit taking is likely at such dizzy heights.
If you want to see a trending chart, then look no further than the EUR daily above!
The dominance of the USD may be in question as the US turns more insular, protectionist and nationalistic and the fact that the US seems to be promoting a cold war with China is certainly one of my main concerns that I have harboured for a while and that is not going away unless Trump realises that this may actually damage his election chances. Right now the US has issues with not only China but the EU and a few others over trade. But his shift to break down the globalised market is a real concern for global trade and global peace. The US is seriously stepping up its rhetoric with China and seems unwilling to get around a table and talk. The US is alienating itself from not only those that it sees as a danger but its allies too and seems willing to step away from being the leader of the free world and all that goes with it. There is a danger that investors loose faith in the USD and if the EUR is seen as something as an alternative now, then the USD could be in real trouble. At the same time the Fed is debasing the USD by flooding the markets with printed money and is why precious metals are soaring.
I think part of the issue in all this is the danger that the US takes a lot longer to recover from the crisis than some others and capital outflow is being seen. I think it will be really interesting to see if US equities now start underperforming. The situation in the US unemployment area is not looking healthy at all and to me, that has been at the centre of why I think the economy will take a lot longer to recover than the likes of the EU and many in the EM space. Unemployment is at the heart of everything and has a huge impact on the psyche of the consumer. Job postings data from Indeed.com suggest that a labour market recovery has barely started. Countries, such as the US, which did not rely on furlough schemes to keep employees attached to their former companies, have seen both more unemployment and a bigger uptick in job postings. Household spending makes up the largest part of the economy in most countries, and the recovery largely depends on consumers regaining the confidence to increase spending from ultra-low levels. Footfall in major cities was starting to recover but a resurgence of cases has seen this stall. The UK is experiencing less of this but many are still not going back to work in London and that will impact.
Chart of retail footfall showing that it remains well below usual levels in most countries
As you can see in the chart above, the US is starting to fade again and it seems many are still reluctant to get back to any kind of normal. The fact is, that consumers have been slower to return even as businesses have opened their doors. China’s recovery seems rather uneven and there again we see a reluctance from the consumer to re-engage and spend on non-essentials. Unemployment and the impact on the consumer are what we need to focus on more than anything else now in my view.
We desperately need a rapid return to stronger global growth but Trump’s administration keeps getting in the way of this and this phase2 of the trade war will be far more damaging to global growth. The pressure the US is exerting on its allies to “pick a side” in the US/China spat is also very concerning. The US seems desperate to halt the technological advancement of China but Xi is committed to a long-term plan to compete on a global scale and is unlikely to step away from that commitment. The other threat to the USD is the Fed. They are systematically debasing the USD with all the money printing taking place and so far, all the potential inflation from such a move is concentrated in asset markets. Things will change if that money ever finds its way to the broad economy. But Fiat currencies are simply based on faith; lose that and you are in real trouble! While the reserve currency does have a special status, there is a chance that the EUR is slowly becoming a viable alternative but it has to be said that the USD move was very broad recently and so while the EUR has slightly outperformed, this move is not about just the EUR (yet). Technically, the USD is breaking down too and this adds weight to a view from many analysts who have been looking for a lower USD for a while. I wonder what the Fed may have to say about their role in all this but much of the blame sits with the government running such huge deficits.
The U.S. is struggling to contain the spread of the coronavirus
As soon as we saw the disappointing US weekly jobless claims, we saw the US curve flatten, suggesting bond investors see a slower recovery in the US. Claims data is up to date and relevant and data seen from last week will now be picked up in the NFP data at the start of August and suggests some weakness in payrolls data. It seems the US is NOT going to have the swift recovery many thought and so surely, this should start to impact stocks. Crucial for a sustainable recovery is confidence that the virus is no longer out of control, and Europe’s relative success may help encourage shoppers to spend and businesses to invest, further propelling demand and growth. The region has also done a better job of protecting jobs and incomes, at least for now, with furlough programs keeping millions of workers on payrolls.
European equities outperformed peers globally since mid-May
But even here we are seeing pockets of virus infections rising as unlocking continues. The world needs a vaccine or confidence will remain low. Sentiment towards the USD is certainly shifting as according to JPMorgan Chase & Co., Europe will do better because it has “broken the chain” that links mobility and the virus. Goldman Sachs Group Inc. has cited effective virus control as one reason it expects a “steeper and smoother rebound in the euro area than elsewhere.”
This loss of confidence in the USD is a real concern but a lower USD is a heathy phenomenon for global trade IF the US allows free trade to continue on a global basis. But history is littered with examples of a loss of faith in a currency and the implication are huge when even a minor currency sees a shift down in sentiment. There is a danger, that after a massive bull run, that America starts seeing global investors look elsewhere now. JPMorgan expects the euro area’s economy to shrink 6.4% this year, slightly worse than the 5.1% contraction seen for the U.S. But for 2021, the bank forecasts a 6.2% rebound for the euro area, more than double America’s 2.8% growth.
Data is starting to confirm the growing divergence as we saw in recent PMI data. Euro-area PMIs jumped more than forecast in July, while numbers for the U.S. came in lower than expected, especially for services, which make up a much larger part of the economy than manufacturing.
The EUR has risen more than 6% against the dollar in the past two months and could have further to run. Maybe the expected extra stimulus of about $1.5trln will help boost the US economy but that remains to be seen (I don’t think the Democrats will accept the latest GOP deal) and there is some wrangling yet to be done but what does interest me is that it does seem that the EUR and its bond markets have established themselves as a viable alternative to the USD and many asset managers and central banks, may reweight the EUR. I will stick with my recommendations below and I think the EURAUD may start to bear more fruit if stocks do have another wobble as I think they may. Of course, the real danger here, as precious metals surge higher, is that investors are starting to doubt Fiat currencies and it is worth remembering that Fiat currency is based solely on faith in its value. Right now the central banks are doing a good job of eroding that faith, especially the Fed.
Long EUR @ 1.1210.. Stop raised to 1.1390
Long EURAUD @ 1.6250 stop at 1.6080
Long EURGBP @ .9020 Stop at .8920
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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