Good Morning.. Wall St had a wobble, led again by the tech sector with the NASDAQ down 2.3% and I think the market is now realising that the US economy is falling off the tracks and headed backwards. This, plus a very disturbing speech from Pompeo, seems to be unnerving markets and about time too. Pompeo was surprisingly direct over China and seemed to be calling for unity in a stand against them, rallying allies to break away from trade with China. This sounds like the start of a cold war to me and has massive implications for global trade and thus, global growth. No wonder stocks are falling!!! It will be interesting to see how we finish this week but interestingly the EUR is still above 1.1600, which screams sentiment shift away from the USD to me and the inverse correlation between a higher USD and Risk-off may be breaking. I remain bullish the EUR and as stocks continue to fall, I can see both GBP and AUD falling further than EUR and even my EURAUD recommendation may start to finally bear fruit. But we have PMI data today to consider and it is likely to be markedly improved from last month but unemployment is the key now. Looks like being a choppy and nervous session and it’s a Friday, so “Be careful out there”..
Keep the Faith…
Details 24/07/20
Stocks fall on fears over the US economy but the USD remains weak.
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Quite a fascinating trading day yesterday with a lot going on and at the core of it was higher than expected weekly Jobless claims from the US in my view. The rise was quite a shock and immediately we saw the US curve flatten suggesting that the recovery may be slower to take hold. To be honest, I was not surprised by this as for some time I have been suggesting that unemployment is the key to whether the US and indeed many other economies can return quickly to some semblance of normality. I think the danger now, is that the US may have a battle on its hands keeping the economy from stalling and dropping back into a longer recession. From restaurant dining to air travel and now to filings for unemployment benefits, a growing body of evidence indicates America’s rebound from the pandemic is stalling days before hundreds of billions of dollars’ worth of federal aid is set to expire and on that front, they are still unable to agree about the structure of the package.
Pace of improvement in initial claims leveling off after big declines months earlier
As we have seen from China, the path after unlocking, is an uncertain and uneven one and the impact on global assets will be notable.
I am not sure a rescue package for the unemployed will make much of a difference as they are treating the result and not the cause. They need to be finding ways of getting workers back into jobs and not paying them more to sit at home earning more than when at work (in some cases). For months we have seen equity investors shrug off bad data due to the shuttering of the economy and the massive stimulus packages unleashed by both the Fed and the government. But the signs are that the US is headed back to the abyss and the recovery is far further down the calendar now. Stocks are lower again this morning as it is suggested that the Republican leader in the US Senate was forced to delay the announcement of a $1tn stimulus package as lingering disagreements with the Trump administration and disarray within the party take their toll. What we have seen is a rotation from tech stocks to value but as I said yesterday, the tech sector is the darling of global markets and a significant fall could easily bring the whole market tumbling down with it. The concentration and ownership in the top 5 mega-caps is huge and a lot of it highly leveraged by the retail community. I am not sure this is a dip to buy just yet.
NASDAQ remains in an uptrend but there are some concerning signs on the charts.
We seem to be rolling over and the daily MACD is crossing lower and we are approaching the mid moving average. I think there is a danger that a weak close tonight could suggest a tough week ahead for global markets next week. We do have PMI data from France, Germany, the EU, UK and US and I expect that survey data to have improved markedly from the previous months but for me unemployment is the real key now and its impact on the consumer.
On top of the weak US data yesterday, we also have growing tensions between the US and China and I think this is starting to register in the psyche of the global investor. This is not going away anytime soon and is part of a prolonged attempt to slow the creeping influence of China on the world stage by the US. This trade war is just getting started and is a massive negative for global growth in my view. In a speech yesterday, Pompeo called on the free world to join Washington in making an about-turn to “rewrite the imbalances that have grown over decades”. This is strong stuff and I am amazed markets have not reacted to the rise in tensions to date. Things are about to get worse as China can’t fail to recognise what the US is attempting to do here; turn nations away from trading with China! This is extremely dangerous. “If we don’t act now, ultimately, the [Chinese Communist party] will erode our freedoms and subvert the rules-based order that our free societies have worked so hard to build,” he said, adding countries faced a choice “between freedom and tyranny”. This is the sort of speech we hear before a war breaks out and is a call to take sides.
The choices for many are difficult, especially for the likes of Oz and others with large exposures to China’s economy. Will some be forced to turn away from trade with China to placate the US and to stop possible sanctions if they don’t? How far is this or the next administration really prepared to go to tackle China? What it will bring, as I suggested yesterday, is the breakup of globalisation and push nations into being more protectionist and insular. This is NOT good for global trade at a time when the global economy is bumbling along the bottom and looking fragile at best. How can stocks NOT take notice of this threat to global earnings? As stated yesterday, it also seems clear that company executives are seriously taking profits in equities in their own firms. This latest escalation in a series will end up in an inflection point soon, that means a real crash for US-China relations, for Hong Kong, and for the Yuan (with its mighty 1.76% share of global SWIFT payments), among other things, if the dynamic doesn’t change; and yet markets will seemingly refuse to notice until they get shot in the head. Has a new cold war just started?
Weaker stocks and yet the EUR still at 1.1600 says a lot to me. We may even be seeing the uncoupling of a stronger USD as stocks fall (risk off) but there is already a clear, significant shift in USD sentiment. Even the likes of the AUD are not showing signs of panic but my EURAUD position is nudging higher but still trapped in a tight range. I think this cross should continue higher if stocks do continue into a weak close for the week.
We are at the upper band and the MACD is crossing above zero and a break of 1.6450 may see this start to accelerate higher but apologies for the slow progress on this; stocks stayed higher for longer than I expected and broke the range but that is starting to look like a false break. EUR looks set to continue its rally against many currencies and if stocks do fall hard, I see GBP and Oz falling further than the EUR. The charts still look very positive to me.
This trend is certainly developing nicely and I still see more of this and my stop is just below the mid-moving average. I think capital is starting to flow into the EU and real money buying has been cited in EUR and DAX. The Dax index turned briefly positive for the year this week, a rare spot of green among European stock indices that have mostly failed to return to where they started 2020 after shedding value in March’s sharp sell-off. I think this may continue and some outperformance could be seen and that should underpin the EUR.
The New York Fed’s Weekly Economic Index (WEI) is reversing course, showing high-frequency economic indicators are turning down.
We have seen a reversal in dining out data and footfall in many cities remains very low as consumer are afraid of public places again. The fact that the US may not be the first or strongest to recover from all this has huge implications for the USD as the Fed is likely to keep pumping out the printed cash and debase the USD. Gold is looking like it wants to make an all-time high and the USD is breaking down against many. But the impact of a lower USD would usually be good for the global economy but Pompeo is doing his best to rip apart globalisation. U.S. high frequency indicators have continued to flash red since late June, suggesting that another round of fiscal stimulus is more than necessary to avoid a downward surprise in 3Q. The USD trend lower is just starting and in the US, the employment recovery is going backwards in states hit hard by virus, small business data shows. Any thoughts of a V-shaped recovery need putting back in the box. Keep an eye on the end of weak equity closes!
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Strategy:
Macro:.
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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