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Trading Strategies – 31 July 2020


Good Morning.. The big tech boys smashed it out the park last night but I think a lot of this was expected and look at Asian markets; Nikkei and Oz down 2%+ and China unch.. NASDAQ futures are higher as one would expect but have we had all the good news now? I am beginning to think that data is starting to matter and that suggests a long and slow recovery. German inflation and GDP, along with the US with rising claims again are worrying signals and we have seen very weak Spanish GDP this morning as we head into EU GDP and CPI today. Take out the top 5 tech stocks and the S&P is not doing that well! I fear we may have a nervous end to the week especially if US spending, income and core PCE disappoint. We also have month-end to factor in but I guess as far as we can see, the Fed and US government will continue throwing printed money at the problem and thus, continue to debase the USD. GBP flew higher and even took me out of my EURGBP long but at zero cost. I remain bearish USDJPY and remain bullish EURAUD, especially if stocks fail now. So tier1 data and month end, what could possibly go wrong and it’s a Friday, so “Be careful out there”..

Keep the Faith…

Details 31/07/20

Have we had all the good news now?

Tech stocks held what looked like a wobbling US stock market yesterday at one point as we headed into the big boy’s earnings releases and boy did they hit it out of the park. Exchange-traded funds tracking the Nasdaq 100 jumped about 1.8% following results from Amazon, Facebook, Alphabet and Apple that showed business was mostly thriving amid the coronavirus lockdown. I guess a lot of this was both expected and priced but even so, the numbers are impressive but look at Asian stocks overnight; not impressed at all with the Nikkei down 2.4% and Topix down 2.1% with China unchanged and Oz down nearly 2%! So, I have to ask as we head into the August holiday period, if we have had all the good news we are going to get for a while as it looks to me that the data we saw yesterday is actually impacting for a change and so it should, especially the rising US Jobless Claims data. Germany also posted weak GDP but also concerningly weak inflation. US Q2 GDP was the stinker we all expected, but can we be sure that we will see Q3 and more importantly, Q4 rebound anywhere near to where we came from; I doubt that. On top of all that, virus cases are rising again and more lockdowns are upon us.

Just look at the USD move we are seeing and we have to ask what this is telling us as the EUR trades above 1.19 and Cable above 1.3100. (GBP rallied against the EUR strongly and my stop at my entry point was hit but no cost) Even that dull currency, USDJPY has sparked into life and broken serious support at 104.74 and looks set to test close to 100 in my view and I remain with my short recommendation of yesterday.

All the signs on this USDJPY daily chart suggest this move extends and on the weekly charts, it looks like we may get another leg lower if we break 103.95 a previous low close. I think equity investors may start looking ahead at how global earnings can hold up in a world with little to no growth and falling inflation and we still have some serious bankruptcies and potential defaults to surface. Pretty soon data will matter again as it becomes clear that there will be no V-shaped recovery. Today we see EU GDP and CPI and is noteworthy after the poor data from Germany yesterday on both fronts. The data from China overnight was OK at best in both PMI sectors. They stay above 50 but they are not pushing on. Non-manufacturing came in at 54.2 and manufacturing a little better at 51.1 after 50.9 last. China has had a significant boost and they have got back to manufacturing stuff but in a weak global economy, they may find demand still extremely weak. Some of the worst floods across China may not be helping and there is chatter that the massive Three Gorges Dam may be unable to hold!

The fact is that unlocking comes at quite a cost. In the US Coronavirus cases increased 1.9% Thursday to 4.47 million and the increase was higher than the average 1.6% daily gain over the past week. Deaths climbed 1.1% to 151,570. In the UK, parts of Northern England are being locked down again and we are still some way off a vaccine and until we get one approved and distributed in large numbers, the impact will remain negative and global growth will remain weak. The Consumer remains a key component for most economies but the US and UK especially so with their impact being greater than 70% towards GDP. In the US the top 10% of households account for almost 50% of consumption, and that top 10% skews heavily to the older, wealthier top tier whose free-spending ways have been built on the enormous wealth effect as their stocks, bonds and real estate assets have soared in value over the past 12 years. Not anymore.

Not only are many of the top 10% older, many of these households are caring for parents in their 70s, 80s or 90s. Given the heightened risks for these demographics, is it really worth it to go into crowds for entertainment? The short answer is no; they are more likely to stay at home. Older people generally hold senior posts at companies but they are not immune from corporate closures or indeed cost cutting and management jobs are being cut. They are also extremely tied into the stock market either directly or indirectly via pensions. A fall on top of the virus could see some serious belt tightening.

A re-weakening in jobless claims data (confirming no V-shaped recovery), a record-breaking collapse in GDP and consumption (admittedly backward-looking) are all rather concerning and we still have no agreement on a bailout deal from the US. I am thinking that we may just have a rather disappointing end to the week. It is hard to suggest that stocks may dump just after those tech results but the rest of the stock market is not actually doing that well and bond markets are screaming danger ahead and so are central bankers and the whole US curve is at record low yields! Only the NASDAQ rallied yesterday and the poor performance in Asia is a canary for me.

Meanwhile, the USD is in freefall almost.

The demand for USDs seems to be waning as the Fed’s “dollar liquidity swap lines” – which provided other central banks with dollars during the crisis – are falling out of use, though the program itself has been extended, just in case. This was the seventh week in a row of declines, now down to $117 billion.

I also note that the Dec 2021 Fed Funds futures is implying a -3bps rate… easing since the Fed this week. These are canaries in the coalmine for me and they are on the bottom of the cage choking their last. Equities may have some adjustments to make. At the same time, we are at week seven since peak Fed balance sheet: Total assets on the Fed’s balance sheet for the week ended July 29, released yesterday, fell by $16 billion from the prior week, to $6.95 trillion. Since June 10, when they’d hit $7.17 trillion, they have declined by $220 billion:

Will they start to reverse this? Everything is set on extend and pretend. Homeowners don’t default on their mortgages; they just enter forbearance. Renters don’t pay rent – and can’t be evicted. Borrowers with big credit card balances and 30% interest rates don’t even have to make minimum payments after they go into forbearance. Same with auto loans. Just how long can this charade go on for? The reality is yet to hit and is why banks are parking billions ready for the default Tsunami that is coming.

These people don’t have the money to catch up on the missed rental payments, because they spent this money on other stuff, and there is a wave of evictions and court cases that loom, unless extend and pretend further kicks the can down the road forever which is doubtful. Never in my life could I have imagined that I would see such a gigantic mess, with so many bailout deals that cost trillions of dollars in so-called stimulus funding every few months to kick all those cans further down the road. We seem to have no exit strategy at all without any plan or idea how to ever catch up with all those missed payments and how to get out of it. What might happen to consumer spending if consumers are having to catch up with those missed payments and having to make current payments again? The reality of all this is yet to hit but the banks and the central banks know it’s coming. The thing about the Fed and the USD is that the Fed, nor the government, are going to stop these bailout programmes and so the USD debasement continues. On that basis, this USD sell-off may be in its infancy and I just wonder how many out there are waiting for a rally to get on this trade?

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Strategy:

Macro:.

Short USDJPY @ 105.25.. Stop at 106.75

Long EURAUD @ 1.6250 stop at 1.6080

Long EURGBP @ .9020 Stopped at .9020

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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