Good morning… A relatively quiet night with tight ranges and China came back from holidays and fixed the Yuan higher which helped markets somewhat. But EUR continued to underperform and it and its crosses look set to fall further with technicals supporting the fall now, especially in EURJPY. Stocks still seem to be ignoring a lot of risks out there as Trump re-opens old trade war scars by attacking China (along with the EU and Oz) over the virus outbreak and China threatens HK protestors again. EU services PMI coming in and Spain saw services collapse and the composite now is single digits at 9.2%; that is nuts. France and Germany will be final readings but the collapse in services in consumer-led economies should be sending shockwaves through the markets but no; the belief is still that we can get through this and get back to normal soon; I very much doubt that. EU retail sales also likely to be awful but this weeks US unemployment is expected to hit 15% ad who knows hat US ADP will print today? The impact of this will be deep and long lasting in my view and that changes everything. The reality may finally dawn that a V-shaped recovery is not possible. The Fed and all CBs seem to be miles apart from how equity investors feel.

Keep the Faith.

Details 06/05/20

EUR underperforms as doubt cast on QE legality but more issues still ahead: Old scars reopen and the EM space is a real concern:

–

I said a couple of days ago that I could not see the EUR rally, after the month end distortion of USD selling, lasting due to a raft of important issues to be resolved this week. Yesterday we saw EUR and EUR crosses like EURJPY all fall and with little of a bounce seen since as the German High Court cast a little doubt on the legality of the QE programme. It is unclear whether this will do lasting damage but my take from this long deliberation was that the ECB have 3-months to clarify the programme is ‘proportionate’ or the Bundesbank can no longer partake!! Hence EUR lower. On the charts we have settled at quite an important level as to my mind, a break of 1.0833 will turn the bias back to the downside for 1.0727 support and then 1.0635 low. Daily chart with Bollinger below.

But we need to sustain a break here and a break of 1.0790 in EUR and I think we kick lower but we are consolidating at the lows but what is encouraging is that EURJPY is breaking lower and is now through previous support at 115.44 and a new leg lower could now be seen.

However, oil keeps rising and so I am exiting long USDCAD here at 1.4050 for a small loss.

Staying with the EU; “It is a very dangerous argument,” said Lorenzo Bini Smaghi (former member of the executive board of the European Central Bank) “The next time the ECB raises interest rates it would have to look at all the negative effects it would have on debtors, the unemployed or on governments whose borrowing costs would rise. It is a very delicate argument that would lead to infringement of independence and of the price stability mandate.” He should know. We still have the 7year EU budget plan to be agreed upon today and I am not sure, in this current environment, they could agree to a 7month budget let alone 7years. I think there is a chance that this gets pushed down the road and there is still an argument to be had on how the rescue package is delivered at some point today.

Meanwhile the USD was rather more mixed with a rally in AUD and the AUDJPY recommendation, while still alive, failed to push lower after breaking 68.25 which is a little worrying. But I think Trump has China in his sights still and that is not good for anyone and especially Oz and while stocks closed up 1% on Wall St, the gains were halved into the close as Fed’s Clarida sounded rather concerned suggesting the government needs to do more. There is still a massive gap between how central bankers see things and how equity investors see things. He suggested unemployment will rise to levels not seen since the 1940’s, while Evans flew a kite and suggested the Fed could look closely at YCC, following again where the BoJ has gone with little success. This is extremely worrying to me as it is again a degree of socializing of US markets and removing any benefit of looking at US bonds to forecast the future; to date an important Bellwether for investors to see what’s coming with inflation or indeed deflation; the forward looking health of the economy. The JGB market is a busted and unused bond market which tells us nothing about the future for the economy due to BoJ manipulation; is that what the Fed really want?

I think there are some old scars being opened up now as Trump targets China (along with the EU and Oz) over the virus outbreak and Trump is threatening to restart trade arguments. We also have China threatening HK protestors and it seems patience is running out again. This and the virus, even having peaked and almost disappeared, is still weighing on Asian markets again. The underperformance is quite staggering and I am not sure this now changes.

There is real risks brewing across the EM space and this could get ugly, especially if the USD keeps rising and US stocks do eventually shift lower. According to IMF managing director Kristalina Georgieva capital outflows from emerging markets have topped $100bn and the fund has received more than 100 requests for help from troubled nations. There are calls for some debt relief! Developed market equity investors seem to be ignoring the threat growing in the EM space. There is a real danger of a rather large wave of defaults looming and I am not hearing or reading much about this. Some research suggests that as much as 37 per cent of the bonds in the benchmark emerging market index, JPMorgan’s EMBI, will default over the coming 12 months!

To my mind there is good reason or two to stick to the old adage to “Sell in May and go away” but to be honest we can’t due to the lockdown! Selling in May and popping into the kitchen does not have the same ring about it. But on a more serious note, the global economy is still stressing and the impact is going to last a lot longer than investors seem to think and we have to question just how many months governments will be prepared to support economies. The UK Chancellor is already looking closely at ending furlough support and the unlocking is going to hurt many as jobs no longer exist. The issue here is the longer this issue persists the deeper ingrained it will be on the consumer conscience. Recessions leave deep and lasting scars on consumers and job losses frighten them, even if they have a job. This changes purchasing habits for a long time and consumers and employees have had a serious shock here. Businesses have also been shocked and seem likely to take a long time before thinking of expansion or spending and CapEx will likely collapse; it was falling when we walked into this crisis. Business development will be at a standstill until a clearer path can be seen and, in the meantime, the world is becoming more protectionist. All this is a negative for a global recovery.

The problem is that the full scope of the economic damage won’t truly be visible until the economy reopens, and consumers realise that many retailers won’t be coming back and airlines and hotels realise that customers are not coming back. But the unemployment levels, distorted somewhat by furloughing, are going to have a dramatic impact on the psyche of the consumer and all that feeds into weaker earnings for most and defaults for many. In just six weeks, the entire global economy has completely come apart and you cannot tell me we can put it back together in the next month or so. Forget a V-shaped recovery as things just don’t work that way with such a dramatic stop in the global economy. The outlook for 2020 is frighteningly bleak to me and has frozen global trade. Modern economies are built on consumers and they live hand to mouth in most cases and finance their lifestyles through borrowing. Those lifestyles are going to have to change as millions lose their jobs and fear replaces greed. Forget a return to normal and in my mind the old normal may never be seen again; there is a potential seismic shift of attitudes going on here and now. We shall see what happens, but for the moment the financial markets are doing their best to try to defy economic reality in my view and central banks are running out of air to keep the balloon inflated.

—————————————————————————————————————-

Strategy:

Macro:.

Long USDCAD 1.4140. Stop 1.3850ish. Squaring up here at 1.4050 for a small loss

Short AUDJPY @ 69.25 added at 68.25 and Stop at 70.25 recent high.

Brought to you by Maurice Pomery, Strategic Alpha Limited.

—————————————————————————————————————-

Strategic Alpha Report Disclaimer

Doo Prime endeavor to ensure the reality, adequacy, reliability and accuracy of all the information provided, but do not guarantee its accuracy and reliability. All the information, analyses, comments, statements, and/or data provided in this report is for information purposes only. Client’s use of any contents of the report as the basis for the transaction, the client shall fully aware of the risks and agreed to bear all the risks. Client shall cautiously judge the accuracy of the information. Doo Prime has no liability for any loss caused by any inaccuracy or omissions of the contents and subjective reasons of Client.

This information is powered by Strategic Alpha. Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice.