Monday, May 04, 2020
Please find below our latest Weekly Trend Update Report covering major asset classes and currencies.
Have a nice week end.
Trend Status Update
Major world central banks provided additional support last week. The Fed expanded its new “main street” lending facility, raising limits to include companies with up to 15,000 employees and $5.0 billion in revenues (opening their access to oil companies), also broadening terms for its state and local government financing vehicle to include counties as small as 500,000 (down from 2 million) and cities of 250,000 (reduced from 1 million). With 2trillion QE out leashed in as many months, the Fed has moved closer towards “helicopter money” and MMT stimulus than ever before and opened the possibility for the Fed balance sheet to move towards the USD10trn threshold (current USD6.6trn from USD900bn before the 2008 crisis). Covid19 is the reason for the latest burst higher in the Fed’s balance sheet but in no way the cause of how close we stand now from sort of a “tipping point”. The Fed could not “take away the punch bowl” in good times and is now in a situation that was well described by Fed Chair Powell last week;
“In terms of fiscal concern…, for many years, I've been, before the Fed, I have long time been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective at the federal level. We have not been on such a path for some time which just means that the debt is growing faster than the economy. This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer run productive capacity of the economy as possible. The time will come, again, and reasonably soon, I think, where we can think about a long-term way to get our fiscal house in order. And we absolutely need to do that. But this is not the time to be, in my personal view, this is not the time to let that concern, which is a very serious concern, but to let that get in the way of us winning this battle…”
Chances are that there is no turning back on this monetary stimulus and that the normalisation will be replaced by something else… Congress is also and already evaluating the opportunity of another USD1trn stimulus.
A former President of the Federal Reserve Bank of Minneapolis, N. Kocherlatoka was interviewed last week by Tom Keene (Bloomberg) and said he was favouring negative interest rates for the Fed making some other (and more) jaw dropping observations;
“One of the roles of economists like myself that are in academia … is to really try to push us into a much better place. I really believe that fifty years from now people are going to look back – economists are going to look back – at the existence of cash much like we look back at the gold standard. We look back at the gold standard as a period which really hamstrung monetary policy and created huge amounts of unemployment as a result during the Great Depression. People are going to look back at the existence of cash and the zero lower bound – the inability to go much below zero with interest rates – in the same way, hamstringing the ability of central banks to provide sufficient support to the economy – and thereby creating excessive unemployment and robbing people of their jobs.”
I do not know what he wants to replace cash with (bitcoins?) but I thought the quote to be quite insightful.
Last week, the ECB also expanded its loans to banks saying it would lend money to banks at rates as low as minus 1% through a planned programme and launched a separate round of fresh lending. The ECB’s governing council said it was ‘fully prepared’ to increase the size of its recently launched €750bn pandemic emergency purchase programme and to ‘adjust its composition, by as much as necessary and for as long as needed’.”
In Japan, “The Bank of Japan… ramped up risky asset purchases and pledged to buy unlimited amounts of government bonds to combat the economic fallout from the coronavirus epidemic. At the rate review, the central bank pledged to accelerate purchases of corporate bonds and commercial paper until the combined balance of its holdings reaches 20 trillion yen ($186bn). It also pledged to aggressively buy government bonds to keep the yield curve low in a stable manner.” The FT wrote a comprehensive article asking the question of debt sustainability (which is a bit too theoretical when interest rates are set to be anchored at 0% or below for years to come). Foreign policy also reviewed the Japanese fiscal situation in an article (dating from two weeks ago), that should get traders inclined to believe JPY is a genuine safe haven currency, puzzled.
Among the risks that resurfaced last week (beyond the fact that WHO warned that it was possible to be infected twice by Covid19 which reduced the interest of establishing certificates of immunity), was D. Trump saying… his hard-fought trade deal with China was now of secondary importance to the coronavirus pandemic as he threatened new tariffs on Beijing. Trump’s sharpened rhetoric against China reflected his growing frustration with Beijing over the pandemic… Two U.S. officials… said a range of options against China were under discussion. Reuters also reported that D. Trump said… he was confident the coronavirus may have originated in a Chinese virology lab, ratcheting up tensions with Beijing over the origins of the deadly outbreak.
Over the past week, the S&P500 dropped -0,1% (-12,1% YTD) while the Nasdaq100 dropped -0,5% (0,1% YTD). The US small cap index rallied 2,2% (-24,5% YTD).
CBOE Volatility Index rallied 3,5% (169,9% YTD) to 37,19.
The Eurostoxx50 rallied 2,7% (-21,4%), outperforming the S&P500 by 2,7%.
Diversified EM equities (VWO) dropped -0,4% (-21,4%), outperforming the S&P500 by -0,3%. The tech picture became more blurred; AAPL rallied 2,2% (-1,6%). FB rallied 6,4% (-1,5%). LYFT sold off by -7,4% (-31,2%). AMZN sold off by -5,2% (23,7%).
NFLX sold off by -2,3% (28,3%). GOOG rallied 3,2% (-1,2%). MSFT was unchanged (10,7%). INTC sold off by -3,0% (-4,0%).
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,3% (3,3%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,9% (-5,8%).
The euro was mostly stronger. EURUSD gained 1,5% (-2,1%) EURCHF gained 0,2% (-2,8%). EURJPY gained 0,8% (-3,6%). EURGBP gained 0,3% (3,8%).
10Y US Treasuries dropped 1bps (-131bps) to 0,61%. 10Y Bunds dropped -11bps (-40bps) to -0,59%. 10Y Italian BTPs rallied -8bps (35bps) to 1,76%, outperforming Bunds by 0bps.
US High Yield (HY) Average Spread over Treasuries dropped -30bps (409bps) to 7,45%. US Investment Grade Average OAS dropped -1bps (105bps) to 2,06%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -5bps (52bps) to 1,04%.
Gold dropped -1,7% (12,1%) while Silver dropped -1,8% (-16,1%). Major Gold Mines (GDX) dropped -1,9% (13,7%).
Goldman Sachs Commodity Index gained 4,3% (-45,4%). WTI Crude rallied 16,8% (-67,6%). The Saudi Arabian Monetary Authority’s net foreign assets dropped by 100bn riyals ($27bn) in March to SAR465bn, the lowest levels since 2011 and the fastest decline in two decades, the FT reported.
Hedge funds’ April results still need to be posted for April but up to March, currency and macro funds were reported to be doing relatively well given the circumstances and could well remain the place to be in this space for the next few quarters.
Over the week end…
W. Buffet initiated a turnaround on a previous call, announcing over the week end that he had sold his stakes in all US airlines; “I don’t know if two or three years from now if as many people will fly as many passenger miles as they did last year,” he said. “If the business comes back 70 or 80 per cent, the aircraft doesn’t disappear. You've got too many planes.” Mr Buffett also said that he had decided against lending large sums as he did during the depths of the financial crisis because Berkshire was not finding enticing opportunities.” This is bad omen for the transport sector today which more often than not tend to lead the rest of the tape (Dow Theory). He also considers he is no competition to outbid the Fed in supporting credit markets (not at that price…).
S&P500 futures -25 points; Hang Seng -3.5%; Japan closed
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