Trading Strategies – 31 March 2020 - Doo Prime News
Doo Prime News > Important Notice > Trading Strategies – 31 March 2020

Good Morning.. Finally we are coming to the end of which has been a very long and stressful March and I hope things can calm down a bit now but somehow I think April is going to be the month when the data picks up the reality of what is happening. I have to admit that I should have waited till the end of the month before recommending selling S&Ps but I am still not convinced about this rally. Month end distortions may move the USD around today but we are seeing some relief in the funding market spreads and a small dip in the front end EDs and so any month end rally in the USD may be an opportunity to sell again in my view. I would love to see a rally in EUUGBP to .9000 area to get short. I still think the EU itself is in some danger as the richer nations refuse to take direct action to help the likes of Italy and Spain and politically, this could become a huge problem. It may not be the Italian or other peripheral debt that fragments the EU, it will be the politics. Oil is off the lows and the bounce in equities into month end has been dramatic but can it hold? Debt is an issue still on all levels. What worries me with regard to the credit space is that we may all find ourselves following the Chinese template with regard to debt and especially household debt. Consumer credit in China is weaker as the weaker employment is spilling into repayment ability and is likely an indicator of what is coming for the US and Europe. This ain’t over yet..

Keep the Faith..

Data.. All Times BST

09:00.. Spain GDP Q4 qoq Cons: 0.5% Prev: 0.5

10:00.. Eur CPI Core y/y (Prelim) Cons: 1.1% Prev: 1.2%

Eur CPI Estimate y/y Cons: 0.8% Prev: 1.2%

Italy CPI yoy March Prelim Cons: -0.4% Prev 0.3%

Italy CPI mom March Prelim Cons: -0.3% Prev: -0.1%

13:30.. Canada GDP mom Jan Cons: 0.1% Prev: 0.3%

14:00.. US S&P/Case-Shiller Comp m/m Cons: 0.40% Prev: 0.4%

15:00.. US Consumer Conf Index Cons: 110.0 Prev: 130.7

Speakers:..

10:00.. ECB Speaker: Holzmann (Very Hawkish), at Press Conference in Vienna

Details 31/03/20

A day or so early with the S&P call but I want to see peak virus and a lower VIX. Still bearish the USD as Fed actions kick in.

We are finally going to put the month of March behind us and what a month! It seems that there were still some funds with equities to buy into month/quarter end and my recommendation to sell S&P seems a tad early but I am still rather sceptical about this rally, even with the huge stimulus that the Fed and government have/are injecting. Let’s see where we are once this week’s data starts rolling in and month end is behind us. But the USD is still sitting in what looks like a downtrend after the technicals supporting the rally break down and the Fed swap lines take effect. I think that is still to impact and the USD may still weaken further, although yesterday we saw some consolidation in the sell-off. Again, within that USD view, I note some weakness in the EUR yesterday and I maintain the view that over time, EURGBP will shift lower as Germany seems determined not to allow unlimited support to the weaker nations within the Union.

The cross traded as low as .8866 yesterday and while some consolidation is expected, I am not sure that is a low in place just yet. I would love to see a bounce to .9000 to get short but fear I may have missed it. Cable is consolidating near the highs but saw something of a squeeze last night in thin market conditions. This is no one-way bet now and we may yet have month end distortions in the USD. But with front end EDs bid and FRA-OIS starting to be impacted by Fed interventions, the USD demand may now fade leaving a gap for the USD to fall back into. I remain bearish the USD for now but I am pulling my stop in Cable up to 1.2200. EUR looks set to test support at 1.0965 and month end USD demand may see that broken. Cable noise today is likely so some my wish to square up.

Germany and the Netherlands worst nightmares are coming true as Italy’s spending habits are drawing calls for the rich nations to bail out the poor and neither Germany nor the Netherlands are having it. This is a crisis that Germany never wanted to face and is why they have balked every time a banking union was suggested as Germany will not stand for a wealth transfer mechanism, especially now with their economy so weak but if Italy, Spain and others are hung out to dry, then the politics of the EU may start to see union the dream crumble.

Italy’s debt pile is reaching dangerous levels. The increasing death toll from the virus and the economic fallout from the lockdown leave the government with no option but to spend more to help its people. But they are going to need help. This is a ticking bomb for the very future of the EU, as the only realistic question for officials in Berlin is how to structure further aid, since the alternative may be a failed state at the heart of the currency union, fatally threatening the whole EU experiment. I guess the ECB could buy all Italian bonds; unlimited but is that viable? Things are looking dire for Italy with Bloomberg Economics forecasting a contraction of more than 6% in the first quarter, while a Morgan Stanley report sees GDP dropping 19% in the quarter on an annualized basis, and by 33% in the next three months. The ECB is there for them but the fact that the rich nations are not, may have a profound impact on relations going forward.

The issue with equities is that the rebalancing is probably close to being done and the front runners may still be long. Weak or possibly shocking data is possible this week and the reality may dawn on just what we face. Is unemployment suddenly going to recover in a week of so or the supply chains fixed or the factories return to full capacity? No. Meanwhile more people lose their jobs and earnings will continue to fall and just how anyone expects a large chunk of the energy sector to survive with oil at 20 bucks is any one’s guess.

Science is clearly making inroads into dealing with this issue and I admire their efforts but the delivery time of new technology or medicines is the issue. We may be to or three weeks away from peak virus in the UK, US and other nations and between now and then, a lot can happen and I am still not convinced the worst of the headlines have been seen in the US. But hope does seem to be playing a role for some now as analysts and economists suggest getting back into stocks; let’s just hope they have got this right but I am not sure at all that we do not re-test the recent lows. We also saw some much better PMI data from China last night with March manufacturing PMI 52.0 vs 44.8 cons and China Services 52.3 vs 42.0 consensus.

Even if, like in Italy, we are told peak virus has been seen; when can the population go out to work again or socialise; the lockdowns will remain in place for some time and that means industry is closed still. I hate this as much as you do but it is a reality. There is not going to be a sudden cut when everything goes back to normal; it will take a long time to normalise and how much risk will the population want to take? At the same time, many consumers around the world are running out of money and jobs. With what is going on, it’s only a matter of time before defaults start spreading within the record $47 trillion pile of household debt globally and you can add the corporate debt out there with many facing funding issues. This issue moves from China, across the globe to the US. The global consumer has been piling on the debt to maintain an unsustainable lifestyle.

Again it is the credit space that needs watching and while the Fed has committed to intervene directly, can it really save everyone? I seriously doubt that. Rating agencies are finally waking up to the reality but they are still conservative and slow.

In Australia, which has the highest household debt levels among G20 nations, the country’s largest lender said on Thursday that its financial assistance lines are receiving eight times the normal call volume. A similar surge in queries has flooded lenders in the U.S., where credit-card balances swelled to an unprecedented $930 billion last year and 3.28 million people filed for jobless benefits during the week ended March 21 — quadruple the previous record. This is real. A recent International Labour Organization report estimated global job losses of almost 25 million, with income losses of as much as $3.4 trillion. And those numbers may underestimate the magnitude of the virus impact, the ILO said. Crikey! The rating agencies are busy downgrading high debt nations like the UK and South Africa but what about the US? Can they be sure that the debt is manageable or sellable now? The problem I have with all this Fed intervention is that it is undermining capitalism itself as nothing is allowed to break, reshape and return stronger. The weak, in some cases will be bailed out and price discovery, even in credit markets, may disappear forever. That suggests markets will be pointless. The Fed is, in part, nationalising markets.

The energy sector has lost extraordinarily $1.15trn in market value this year as oil prices have plunged to almost unimaginable levels.

The speed of this move is breath taking to say the least. The oil futures curve is in steep contango as the active contract in Brent yesterday went below $23/brl and stories have recently surfaced that physical oil is being transacted at $8/brl and oil storage is running out of capacity. Some of the companies in the sector are the walking dead. High yield bonds in the energy sector have seen their option adjusted yield spread to Treasuries widen to the highest levels on record and implied default probabilities are rising fast. Debt is an issue still on all levels. What worries me with regard to the credit space is that we may all find ourselves following the Chinese template with regard to debt and especially household debt. Consumer credit in China is weaker as the weaker employment is spilling into repayment ability and is likely an indicator of what is coming for the US and Europe. In China, loans to households have risen by 22% annualised and the worry is that at some point this credit expansion will lead to an abrupt halt like we saw in 2008 in the developed world.

I think the markets are massively underestimating the damage being done here to the global consumer and I also think that earnings forecasts are probably still high.

The chart above was the data from the Dallas Fed but on top of this, we have to consider the millions of job losses and just what that does to the psyche of a family with someone losing a job in it. Millions in the US alone are going to be impacted by this slowdown and the recovery may take time to heal. Will the consumer head back to non-essential shopping soon? Probably not if there is a fear of job insecurity. It could be Q4 before we get through this and the psychological damage done to the consumer may last longer; we simply do not know. The point being that the global economy has shut down which suggests to me, anyway, that any prior frame of reference you may have had about money and business and social normality goes out the window. The economists keep suggesting that we know all this and that the shock has been seen but really? Can we be sure of that; I admire their optimism.

Analysts are guessing; there is no model for this. I am guessing too and I may be wrong but at least I am honest and not trying to lure you to your financial death by investing because I get paid if you do. The Pied Piper is seen regularly on financial TV but the unknowns are everywhere. Maybe the world needs a reset but unfortunately the Fed and the governments will fight this, as they long for the status quo as everything else frightens them. But will the world be the same in a month or so? I am not convinced it will. We are told the rescue packages will be a bridge for a couple of months until everything gets back to normal; they are kidding; right? What is normal anyway? There is a very real chance that a new normal is born but what will that look like? If we look back at global events like world wars; nothing was ever the same again afterwards. This may not last as long as a war but change seems inevitable to me.

This virus episode is being treated like a war, a war on the home front: and wars on the home front mean zero rates, yield curve control, and fiscal deficits from 15 to 20% of GDP. Markets have, of course, tried to rally on that front. It’s even been seen as patriotic in some cases. But time will tell if this rally can hold and I have my doubts. Dr Fauci, the leading medical expert on the White House team, has stated he expects to see millions of infections and 100,000 – 200,000 US deaths. Even Trump has said 100,000 deaths would be a “very good job”. To put that in context, were we to exceed that total by just a little it would mean more civilian deaths than the US suffered in combat in WW1, Vietnam, and Korea combined. In other words, a major shock. Looking ahead to when we get past all this and get past it we shall, what does the economic and financial world look like when debt to GDP will be 20-30ppts higher at least, behaviour will have changed, SMEs may have been savaged, globalisation undermined, and the government will have many large fingers in many pies? Morgan Stanley suggest that global growth for full-year 2020 will still see a decline of 0.6%Y, past the 0.5%Y rate of contraction we saw during 2008 and, on their estimates, the weakest pace of growth during peacetime since the 1930s. Which asset class, if any, looks a winner on that basis? Do you know something; I am not at all sure as any recovery, when it comes will likely be tepid and slow.

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Strategy:

Macro:.

Long Cable at 1.1675.. Stop Moved to 1.2200..

Looking to sell EURGBP on a rally back above 90.00.

Short S&P 2558

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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