Good Morning.. A late fall in US stocks saw a mixed session in Asia with low volumes as we wait for the FOMC tonight but there seems to be a lot of uncertainty out there. To my mind we are at something of a crossroads and the impact of the virus is just one of many issues. I expected to see some profit taking on the USD but so far very little of that has been seen and USDJPY has firmly joined the party. Looking at my charts, there is an argument for USDJPY to have another leg down. But I took profits on EUR/USD yesterday quite happily but I do feel this USD move may not be over. More stimulus from the US government will see the Fed balance sheet extend over the ECB balance sheet and this seems to be impacting the USD. The Fed is unlikely to do much tonight but Powell will certainly have concerns about the Tsunami of bad loans coming and US unemployment weighing on any potential recovery. I did also note with some concern the Santander earnings where their Q2 loss was €11.1 billion, estimate profit EU828.5 million (range EU662.0 million to EU1.02 billion)! Watch EU bank earnings this week! So far, the USD is showing no signs of fear after this recent move lower but I do get a feeling that stocks may be due for another wobble. Today, the CEOs of Amazon, Google, Apple and Facebook will testify before House lawmakers over allegations of anticompetitive practices and tomorrow about 45% of the NASDAQ report earnings! I am holding onto my EURAUD longs and my EURGBP.
Keep the Faith..
Details 29/07/20
Uncertainty everywhere into the FOMC:
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I think we are at something of a crossroads in global markets and everywhere I look it seems we need clarity on many things still. For instance, we have more encouraging news on a potential vaccine from Moderna testing but how long will it be until trials on humans are started, let alone finished and a vaccine delivered to the masses? We have the FOMC where we are unsure if the Fed even needs to do more for markets that have rallied strongly from the rout in March and having extended their support packages for a further 3 months (yesterday). The other point being that more balance sheet expansion will do nothing to generate growth or inflation in the broad economy, as seen elsewhere. It is becoming abundantly clear that the Fed’s sole aim is to keep asset prices from falling. Do we really need more Fed stimulus? They seem to be very concerned by something, as indeed the banks are, looking at the loan provisions being made recently and the Fed is very aware of the potential dangers still out there in the credit space as the Tsunami of defaults and bankruptcies is yet to hit but the sea has rushed from the shoreline; it’s coming! I did also note with some concern the Santander earnings where their Q2 loss was €11.1 billion, estimate profit EU828.5 million (range EU662.0 million to EU1.02 billion)! Watch EU bank earnings this week!
I think we will end up with something close to $1.5trln for the US bailout programme. US Treasury deposits at the Fed are essentially the Treasury’s checking account balance. It’s money that has already been “raised” (printed to you and me (I must get me one on those machines)). It currently stands at $1.8tn vs a normal run rate balance of $400bn on the high side. This implies that $1.4tn is already sitting on the side-lines in the Treasury’s checking account ready to be deployed. In other words, the Treasury has capacity to spend $1.4tn without having to issue more debt. Therefore, this seems like a reasonable dollar amount for the next stimulus package or close to it. But they need to get a move on and stocks fell into the close as a deal seems some way off still. The attitude in both camps is still to do whatever it takes so some compromise does seem likely to me.
Regardless of the actual number though, what is clear is that deploying that money will increase the money supply even further, even if the velocity (i.e. circulation rate) is still low. That fact is likely to keep the US money supply growing at a faster rate than Eurozone money supply, even with the recent Eurozone stimulus announcement. The relative money supply growth between the US and Eurozone has been a good coincident indicator of the US dollar index, since that index is weighted nearly 60% towards the euro. As of this writing the US dollar index is trading at multi-year lows.
Looking at the chart above, we should be able to say with at least a decent level of confidence that the stimulus round in the offing is US dollar bearish. Yes, I realise I squared up my EUR/USD position yesterday but it was a good run. I just hope for a round of profit taking which to date, we have not seen. (Think USDJPY maybe on its way to 100.00)
Some of lending facilities, which were designed to support short-term funding and corporate debt markets and to offer loans to struggling midsized businesses, were due to expire at the end of September and have been extended to December and I think this bolstered US markets yesterday afternoon before the sell-off. The chart below is very helpful in seeing how much/little the Fed has actually done. Their ability to use these programmes seems to be enough as the markets do their work for them (front running to you and me).
July 22 Federal Reserve’s alphabetti spaghetti
Quite what they will deliver today is unknown but policies will likely be on hold but I am pretty sure the Fed still has huge concerns over unemployment and its impact on the pace of any recovery. Markets seem to expect something on forward guidance and I am sure he will reiterate “lower for longer” but I don’t think we get much from Powell tonight apart from risks remaining firmly to the downside. He may have a comment for the politicians too as the bickering over the support package looks like going to the wire and has to be done before they head off for the summer as most programmes expire on 31st July. Even Trump doesn’t like some of the Republican plan, let alone the Democrats, who want a far bigger commitment but most think a compromise can be found as it simply has to.
Consumer confidence in the US missed expectations and has fallen quite a bit now and the impact of high unemployment and fears over the virus clearly remain as these data were for July.
To my mind, unemployment and the consumer are front, central and back for the US economy and any data connected to these are hugely significant now and are closely related. Headline consumer confidence fell from 98.3 to 92.6 (well below the 95.0 expectations) and suggests this may spill into spending or the lack of it. While Present situation confidence rose to 94.2 vs. 86.7 last month the worrying stat in all this was that Consumer confidence expectations fell to 91.5 vs. 106.1 last month. No V-shape in that! Tomorrow we get another look at the high frequency weekly Jobless Claims data and another rise there will suggest NFPs may be a stinker as these data will be picked up in that gathering of data. I can’t emphasise enough just how important both unemployment and the consumer are to the US recovery and right now and those data are going backwards. This will all feed into the Fed thinking but they probably still need more data to make any further moves, especially having extended the support programmes yesterday.
Treasury real yields extend fall to close at record low
One of the other uncertainties out there is the ratcheting up in the US stance against China, especially after the Pompeo roadshow to garner support from US allies to stand together against China. I have said all along that Australia and a few others, sit right in the middle of this and that taking sides will be extremely damaging one way or another and we had some interesting comments from Australia’s Foreign minister last night. He said that US/Australia share commitment to rule of law, reiterates will hold China to account over HK; (But) Australia doesn’t agree with US/China on everything; relationship with China is important, has no intention of harming it, but won’t do things that are contrary to our interests. Seems they are balking at damaging their trade relationship with China and it always was going to be a tough decision. But this next phase in the trade war is what really concerns me as it stands in the way of any global recovery and could do irreparable damage to trade. I am not convinced that this is fully factored into the thought process of investors but I think it is time to take profits, or at least some of them.
Today, the CEOs of Amazon, Google, Apple and Facebook will testify before House lawmakers over allegations of anticompetitive practices. For members of the House Judiciary antitrust subcommittee, it will be their sixth hearing in their investigation into Silicon Valley antitrust accusations. The session also arrives as scrutiny of the behemoths is surging across the globe, including an expected Justice Department antitrust case against Google and the recent launch of two European probes of potential anticompetitive behaviour by Apple. Is this significant? Not yet but it could be. It will also mark the first time Jeff Bezos, the world’s richest person, has offered testimony before Congress. I just wonder if the conversation moves from antitrust issues to issues like hate speech or other issues. Lawmakers will likely question Bezos about whether an Amazon lawyer misled the Judiciary Committee last summer by claiming the company doesn’t use data collected from third-party vendors to launch competing products of its own. Zuckerberg will likely face questions over acquisitions of former rivals WhatsApp and Instagram, while Sen. Elizabeth Warren (D-MA) and others have called for regulators to break up the social media giant. Now that would be a story. On top of all this we still have a week stuffed full of tier1 data. So much uncertainty out there.
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Strategy:
Macro:.
Long EUR @ 1.1210.. Profit taken at 1.1735
Long EURAUD @ 1.6250 stop at 1.6080
Long EURGBP @ .9020 Stop at .9020
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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