Sunday, February 16, 2020
Please
find below our latest Weekly Trend Update Report covering major
asset classes and currencies.
Have
a nice week.
Marc
Bentin
Bentinpartner GmbH
Trend
Status Update
Each passing day still brings a reason to grow more concerned, if not
for the stock market, at least for the sanitary and economic impact. Last Friday,
it was that 1,700 Chinese healthcare workers that became infected (with 25,000
deployed to Hubei Province). Over the week end, it was the likelihood of being
infected more than once after being cured by its own metabolic defences or with
the help of some medicine only to get sick again with a higher probability of
heart failure. Another one is the fact that the incubation period could last
well over 2 weeks and up to 24 days without being noticed. Bill Gates warned over
the week end after donating USD100mn to fight the decease, that up to 10mn people
could die from the Corona virus with Africa particularly vulnerable, he said. For
a factual and balanced review of the Corona situation, check this week end’s article from Der Spiegel (also see The Economist Article).
For what it is worth, equities rallied to record highs just months
before the LTCM/Russia collapse in 1998. Stocks rallied to record highs in 2007
even as the mortgage finance Bubble faltered. The only difference is that interest rates are
now at zero...and that every mild equity selloff is counteracted with a presidential
tweet, a rate cut or more (non) QE or promises thereof. Anyone saying that (non)
QE and ZIRP do not ‘cause’ equity markets to rally is
just oblivious to reality. The current environment is taking risk away from the
investment equation and puts leverage at the forefront of what everybody wants
to do to escape the upcoming global monetary debasement. Nobody will tell us when the time has come to
panic (with the obvious answer being never) and leave… We are on our own.
It might be too early to judge any long term or even lasting economic impact
but China’s consumer prices rose the
fastest in more than eight years last month (CPI Food Index posted a 20.6%
y-o-y increase in January, the highest since March 2008) with ailing transport
links across the country making further gains in the coming months likely. Also, January’s China’s auto sales plunged 20.2% from
a year earlier. Specifically, “Morgan Stanley suggested that real time
measurements of Chinese pollution levels would provide a "quick and
dirty" way of observing if any of China's major metropolises had returned
back to normal. What it found was that among some of the top Chinese cities
including Guangzhou, Shanghai and Chengdu, the same pattern was evident – air
pollution was only 20-50% of the historical average”, ZH reported citing Morgan Stanley conclusion that
"This could imply that human activities such as traffic and industrial
production within/close to those cities are running 50-80% below their
potential capacity."
Over the past week, the S&P500 gained 1,6% (4,9% YTD) while the
Nasdaq100 rallied 2,4% (10,4% YTD). The US small cap index gained 1,8% (1,3%
YTD). CBOE Volatility Index sold off by -11,6% (-0,7% YTD) to 13,68. The
Eurostoxx50 gained 1,1% (3,1%), underperforming the S&P500 by-0,6%.
Diversified EM equities (VWO) gained 1,9% (-1,6%), underperforming the
S&P500 by 0,3%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7
currencies gained 0,4% (3,0%) while the MSCI EM currency index (measuring the
performance of EM currencies vs. the USD) gained 0,3% (-1,0%). Over the week, the
euro weakened across the board dragged down by weaker than expected growth
numbers in Germany, negative interest rates (the biggest factor in our view when
a pair breaks lateral movements or a trend) and momentum selling after the euro
breached trend lines. EURUSD dropped -1,0% (-3,4%); EURCHF dropped -0,5%
(-2,0%); EURJPY dropped -0,9% (-2,2%); EURGBP sold off by -2,2% (-1,9%, Z-score
-2,5). It has to be said that although speculative EUR shorts remain dominant
as per last Friday’s COT report, sentiment was rather negative on the dollar going
into 2020 (from yours truly included) and that these positions and views are
being revised now. We were and remain bearish on the dollar selectively for now
vs. certain EM currencies (RUB and MXN as well) but the technical breakdown of
the euro cannot be denied and we switched to using EUR as a funding currency tactically
as well. Not everything that comes from a weaker euro is negative as the good (near
term) performance of European equity markets can attest. It will also guarantee
higher tariffs from D. Trump as the 5% tariff increase on airplanes decided on Friday
can attest. If what is left of a weaker euro is to end up on Trump’s “currency
manipulator” list, then it is not positive as it will keep detracting investors
from investing in Europe. After all, to buy GAFA’s (considered as a safe bet by
many international investors including Apple when its supply chain is totally
disrupted), you need dollars. And to build factories in the US at the expense of
European exports (say Daimler or Airbus building plants in the US), you need
dollars as well. Europe is pursuing the exact opposite strategy as China in terms
of doing its best to attract foreign capital inflicting a negative interest rates
on anyone holding its currency for no reason (only the Swiss have a legitimate
reason in our view because Switzerland has no debt and a well-functioning
economy and everybody is chasing its currency for that reason). China targets a
Fed funds +1% rate (give or take) especially for that reason of protecting the
currency and attract capital (into bonds and stocks) and it works. CNY is
holding firm despite being the epicentre of the corona virus outbreak. Demand
for Treasuries and HY bonds is returning, as opposed to demand for European
bonds (by foreigners). That obviously excludes Greek government bonds whose 10-year
yields dropped below 1% (without being yet eligible for ECB buying which might still
be forthcoming…).
10Y US Treasuries were unchanged on the week (-33bps ytd)
to 1,58%. 10Y Bunds dropped -2bps (-22bps) to -0,40%. 10Y Italian BTPs dropped
-2bps (-49bps) to 0,92%.
US High Yield (HY) Average Spread over Treasuries dropped -10bps (8bps)
to 3,44%. US Investment Grade Average OAS climbed 0bps (5bps) to 1,06%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -2bps
(-4bps) to 0,47%. Lebanon’s foreign debt sank to a record low as speculation
mounted that the government may not repay a $1.2 billion Eurobond due in less
than a month. Investors are pondering what shape a default might take.
Gold gained 0,9% (4,4%) while Silver gained 0,2% (-0,6%). Major Gold
Mines (GDX) gained 1,4% (-3,3%). As we stated before, we share Ray Dalio’s opinion expressed in Davos that ‘cash is thrash’ …with
the caveat perhaps that the more you have of it, the better. Looking at the
price of everything, hard or financial, cash is losing its “interest” and value
as a store of value. This is one way of reading the ongoing joint runaway rally
in equity markets that defy dimming economic prospects (and high valuation) and
the all-round appreciation of the precious metals’ complex. Cash will persist as
a mean of payment to buy anything more tangible than paper and ink. It will also persist as a unit of account to
calculate the speed at which cash is (and will be) losing its value vs. hard
assets and financial asset as well. One caveat perhaps has been the reported decline
in physical demand coming from China. However, and to the extent that the
nominal outstanding in gold backed ETF’s reached fresh highs last week, chances
are that investors’ demand continues unabated. As a recent report from Degussa showed, ETF outstanding holdings seem to be the head that leads the tail for global
investment demand and price, perhaps more so than physical demand. The fact
that ETF outstanding (and demand) has recently exceeded that of its previous
peak in 2012 (while the price of gold at least in USD is still well short of
its previous all-time highs) suggests that ETF flows may be a leading rather
than lagging or worse contrarian indicator of gold price performance.
As regards the Chinese physical demand itself, we do not see the reason
why investors would reduce their purchases of gold on a lasting basis except if
they cannot go shopping for much longer and also because there is a time tested
pattern suggesting that Asians are reluctant buyers of gold at historical highs
which is where it is trading against many currencies including their own.
Goldman Sachs Commodity Index gained 1,9% (-9,9%). WTI Crude rallied
3,4% (-14,8%). OPEC slashed its oil demand forecast last week, and Goldman
Sachs doubled down on its bearish oil take cutting its oil price target by $10
to $53 for the year, as a result of a "demand shock" that is set to
collapse Chinese oil consumption by 20%, or as much as 4 million barrels per
day, the report said.
Over the week end…
China pledged to roll out more effective stimulus despite a widening
fiscal gap as the novel coronavirus hits an already slowing economy,
highlighting the challenges the epidemic is imposing as the death toll stacks
up and thousands of new cases are reported each day, Bloomberg reported.
As EU leaders are set for a summit next week French
President E. Macron urged the EU, and Germany in particular, not to
let the debate over the bloc’s budget distract them from their real challenges,
calling on them to step up investment in technologies of the future like 5G
networks, cloud-computing and artificial intelligence. He questioned the
validity of debating whether the next seven-year budget should be 1% or 1.1% of
the bloc’s GDP. “The (current) policy mix is mad in an environment
in which borrowing costs are essentially zero”, he said.
President Donald Trump’s top energy official said
he’s confident that Russia won’t be able to complete the Nord Stream 2 gas
pipeline in the Baltic Sea -- and signalled that the U.S. will press forward
with its opposition to the project. Trump has assailed Germany for giving
“billions” to Russia for gas while it benefits from U.S. protection. Even as he
spoke, signs emerged that Gazprom’s attempts at completion may be underway.
Elon Musk’s plan to build an electric car plant in
Germany has run into legal trouble after a court said clearing a forest near
Berlin for a new Tesla factory must stop immediately.
Boris Johnson is preparing to dismiss demands by
Brussels for the UK to abide by EU rules on tax and workers' rights after
Brexit, The Telegraph reported.
Japan will report Q4 GDP today, likely showing a
-1% QoQ decline (from +0.4% previously) as the
country takes the hit from the corona virus.
Trend Score Card
Click here for technical annotations.
US
& International Equities
Check out US and International Stocks’ Technical
Trend Status.
Sector
Trend & Momentum
Check equity sectors’ trend and performance …and when
they break out!
Fixed
Income
Check out 10Y US Treasury and Bund yields, their
trend, expected Fed rate moves and speculative positioning in 10-year Treasury
Futures.
US Recession
Risk Radar
A comprehensive list of
economic indicators to compare the current situation with previous recessions.
The
Dollar
Check out where the Dollar stands Trendwise and Breakoutwise vs. G7
and EM counterparts.
Precious Metals
Check out where precious
metals stand Trendwise
and Breakoutwise.
Get a sense of options (cumulative open interests on calls and puts) and futures
traders’ sentiment (non-commercials open positions).
Why Trend Following Matters and How It Can Help
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trend following investment approach can serve as an effective portfolio
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