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Trading Strategies – 30 June 2020


Good Morning… So, here we are at month end and it seems all the rebalancing may now be behind us and stocks rallied yesterday as Facebook survived the storm and investors “looked through” the issues facing the company. They are so reliant on ads, that I guess the will have to change. US virus stats were better but they always are on a Monday so careful with the stats today. To my mind we could see further pain but in reality we remain in a range on S&P. Governments are going to continue spending and the US needs to pass a package to help the unemployed very soon and time is running out. Boris is also going to spend but at least he is targeting infra-structure spending that will have a long term benefit and return. In many cases the printed money is wasted on zero return projects like social welfare, defence and debt service; this is deflationary and pressures growth; not create it. The EU/UK trade talks don’t appear to be going that well and they still seem to have irreconcilable differences and to my mind, that will keep GBP capped and EURGBP bid. The UK may also lag the EU in emerging from this crisis. I am recommending buying EUR here at 1.1210 with a stop below 1.1150. We have Powell and Mnuchin in front of the House today and a couple of BoE speakers. Canada GDP may also be worth noting.

Keep the Faith..

Details 30/06/20

Stocks rise as Facebook survives the storm. Boris is right to spend on infrastructure. With MMT, the problem is government spending has shifted away from productive investments.

Stocks opened weakly in Europe but soon started to rally yesterday as it seems to me that investors are looking at the EU coming out of this crisis quicker than others and possibly even the US. EU stocks kept US futures up for a lot of the session but it was the turn in Facebook shares that calmed the nerves and US stocks held gains through the session. But I think we may see some out-performance form EU stocks in coming weeks and this may hold the EUR. It seems that a lot of the pension fund rebalancing may have been done and there was not a great deal of activity into the FX fix at 4pm either apart from what looked like some GBP selling. This had helped EURGBP to new recent highs at .9175, just under that .9182 retracement level and initial objective area I had mentioned. I still think this cross can do well, especially if the EU is going to be the strongest or first out of this crisis as to my mind, neither the UK nor the US will be. Plus Merkel and Macron are pressing hard on those less keen on joint bonds for the weaker nations.

The cross is consolidating near the highs but the way I see the daily chart above, suggests we have a way to go yet. The trade negotiations are still on-going but there are still some serious red lines that neither want to cross. That clock is ticking.

Dombrovskis, a European Commission executive vice-president, said the UK had so far answered only four of 28 questionnaires sent by Brussels seeking information about British regulation of the financial services industry after the Brexit transition period. Trust me, the City is an emotive subject. British officials said it was the EU’s fault that talks between the two sides on financial services had stalled, and that Mr Dombrovskis’ claim that the UK was dragging its feet was “complete rubbish”. That’s all going well then! That does not give me much confidence in all this and there is a long way to go. Level playing field issues and fishing still remain core problems but the UK needs some decisions by the autumn to be able to ready businesses for the eventual outcome. Today sees us pass the original deadline on talks and we move on towards the 11th hour and investors do not like uncertainty and yet we have months of it coming. I think that will keep GBP capped and the UK will be struggling to emerge from this current virus crisis and thus, EURGBP may yet have some room to run. (May take a breather today)

I was rather surprised US equities held their gains after the European session ended as while some of the virus stats were better from Florida and Texas, Monday readings often are. But US markets also got a lift and stocks clearly rallied on better Pending Home sales data.

This chart sums up the mess the data is in. After crashing by over 20% mom in both March and April, analysts expected a 19.3% rebound mom in May but instead it exploded by a record 44.3% mom but a couple of points here; 1) pending home sales remain down 10.4% yoy and 2) Existing Home sales fell steeply while New Home sales rose so it is not really a clear picture. But global equities are having their best quarter for a decade.

Data is still more confusing than helpful and markets seem to pick and choose which they react to. I guess a lot of it just reflects the obvious impact of reopening but that reopening of economies comes with a clear and obvious risk; more cases of the virus. We saw better China manufacturing PMI data last night which helped Asia stocks rally. However, as Bloomberg report, while parts of the economy have recovered from the virus shutdowns, there’s an apparent divergence between demand and supply – factories and companies have returned and output is growing again, but exports and domestic retail sales are shrinking (and manufacturing employment fell back into contraction at 49.1). But as we are about to find out from the US weakly jobless claims and NFP data both released this Thursday, millions of Americans are still not working and while some are furloughed, many may be on the brink of becoming unemployed.

In the US in particular, due to the way the unemployment report is put together, it is almost impossible to tell how bad the unemployment situation is, as we have no idea of the split between furloughed and unemployed. It is almost a waste of time looking at it, let alone trading on it. On top of all the data this week that includes the US manufacturing ISM, we have Powell and Mnuchin facing the House today and the release of Fed minutes to consider on Wednesday. This shortened week is not getting any easier. Last night in comments released before his appearance in front of the House today, Powell said that ‘recovery path is ‘extraordinarily uncertain’ amid efforts to control virus’ but sees light at the end of the tunnel as businesses reopen doors and employment moves higher. Hmm.

We have already had a tough year and we are still only halfway through it; but we have been hit with just about everything imaginable and a few things, like a pandemic, which were not. We have seen the full force of central bank liquidity opium poured into the financial markets backed up by massive spending by governments; surely the drugs dispensed are enough and that is enough to hold all this together but what if it isn’t? The US government is running out of time to get more funds to a mass of unemployed Americans and if they don’t, they may well be judged harshly come election time. They have to get this through and soon. The markets are still very nervous about the absence of a vaccine and growing unrest between the super-powers of the world. China’s top legislative body approved a landmark national security law for Hong Kong, a sweeping attempt to quell dissent that risks U.S. retaliation and the city’s appeal as a financial hub. The US is already reacting to this and we see that the US ends exports of defence equipment and restricts dual-use tech to Hong Kong; and is restricting access to high technology products to Hong Kong. This is just the start as the US pares back the special status for HK. Relations between the US and China are souring dangerously. It is time for both foreign companies and indeed those wealthy enough to do so, to consider whether it is now worth staying as HK will never be the same again; shame.

These are nervous times but a time where we struggle to compare to any time in history; unprecedented times indeed. Markets seem to react to a crisis and then immediately discount everything and look forward to how great things will be when we get through it. This is rather insane behaviour but who I am I to stand in front of it. But that 2910-3250 S&P range still holds. It is pretty pointless looking back on things like the housing and financial crisis that hit in 2007, or valuations in the Dot.Com crash, or faith in credit constructs like during the European Sovereign Debt crisis in the 2010s. In each case of financial mayhem I’ve experienced since the Crash of 1987 (yes I was trading then), the initial shock and horror gradually lessens as the market discounts the shock, shrugs it off, and carries on but I get this funny feeling the world is changing and some of that is to do with this dangerous walk back from globalisation, nationalistic politics and a massive and damaging wealth divide; all of which could tear nations apart or set them against each other. The issues were brewing well before this meteor-like virus impacted on planet earth and forced the global economy into an enforced coma. We have never experienced this before and so how can we be so sure that we can deal with this soon and return quickly to normality? Where will unemployment levels be in 6months or a year from now or earnings? If someone tells you, I can guarantee they are guessing.

I can still remember (though many have forgotten) that rather damning stress test report on US banks by the Fed which struck a worrying chord and shows just how fearful they are regarding non-performing loans and defaults. In fact if you listen to most central bankers, their mood is verging on fear of what may be coming and nothing like the talking heads in the media who clearly have a vested interest. Companies failing to pay rents or dividends is no longer just a banking problem. Risk is now far more widely spread across the whole financial system: insurance companies and sovereign wealth funds own most City offices; Fund managers that rely on dividend income are likely to be sadly disappointed as incomes dry up as a result of government fiat or on the back of the dismal earnings season we’re about to experience. The ripples expand widely and encapsulate a huge swathe of the economy. The big shock may even yet to have hit us yet; who knows and until we have a vaccine, I will remain cautious. Even if we do get one soon, is the world going to be the same and will the US change its outlook on its trading partners beyond the US borders? The trade wars may just be starting and what happens if the big 5 tech companies do get brought to heal on tax issues and other dodgy behaviour? But at the end of the day, even with all the stimulus, global trade matters and looking forward, that is starting to look rather vulnerable.

With economic growth sluggish, unemployment high, and the wealth gap widening, politicians will be increasing pressure to delve deeper into MMT to cure their/our economic woes. In fact this modern theory is in full swing and has been for some time in the US but is being embraced across the developed world (and China). Debt, it seems, is not a problem (as long as rates stay close to zero). While the Government can indeed “print money to meet all obligations,” it does NOT mean there are not consequences; it will only be a matter of time as borrowing from the future is finite as the side effects end up catching up with you. Well, not you but your children. Most of these clowns will be long gone from office when that roof falls in. The only debt borrowing that can deliver growth is infrastructure spending but the problem with that is that it takes years to see the benefits. The UK PM is correct in pushing for infrastructure spending as it can build the foundations of growth in the future. There is no disagreement about the need for government spending.; the argument I have, is with the abuse and waste of it. Benefits and one-off payments are a waste of time and money and printing money to give to banks when there is no demand for loans is just irresponsible and the Fed knows these funds end up in equity markets. No wonder US banks make so much money; they are gifted it.

With MMT, the problem is government spending has shifted away from productive investments. The US is screaming out for better sewers, repairs to bridges and modernising underground systems and roads. Instead, spending shifted to social welfare, defence and debt service, which have a negative rate of return. This is popular politics on full show, again started by Trump and embraced by many others. Here is a stat for you; in the US and according to the Center On Budget & Policy Priorities, nearly 75% of every tax dollar goes to non-productive spending. Keep that thought. There were fears that QE and now MMT will spark massive inflation at some point and who knows, it may one day but there is a flaw or two in that argument. The first is that if the Government was running a massive deficit, funding productive investments, then “inflation” would indeed be a problem at some point in the future. However, increasing deficits for non-productive purposes slows economic growth and is deflationary. Even a cursory glance at GDP, the deficit, and inflation, show the error in MMT’s premise. But also, all the QE funds ended up in asset markets and that is where all the inflation is. The danger is that one day far, far from now, all this money finds its way back into the broad economy but that is hard to see happening just yet. Powell previously stated the economy should grow faster than the debt. Yet, each year, the debt continues to grow faster than the economy. Hmm; just how long can that go on for?

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Strategy:

Macro:.

Long EURGBP @.8978 added @ .8940. Raising stop to .8940

Long EURCAD @ 1.5340.. Stop at 1.5220

Long EUR @ 1.1210.. Stop at 1.1150

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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