Good Morning,.. Pretty quiet session in Asia but EU stocks open higher than expected as oil extends gains. But interestingly, the USD remains bid in all this. I think GBP is still in for a rough time but support down at 1.2160 held the first attack but a break there and Cable will be sub 1.2000 in my view and I remain bearish as time is running out for a trade deal for Brexit (see below). Barnier is due to update us on progress later but there will be a decision in June about whether to continue negotiations or not! The clock is ticking and both UK and EU investors are getting nervous. Once again, the USD looks the best of a bad bunch. I am bearish on both EUR and Cable. What does worry me is just how far Trump will go baiting China. This comes at a nervous time for US stocks and they looked fragile yesterday before the bond maturity of 183 bln MBS (That turned banks higher along with energy sector). US Retail Sales, IP and Michigan confidence are all important data later and it’s a Friday so, “Be careful out there”…

Keep the Faith..

Details 15/05/20

GBP to remain capped as Brexit uncertainty returns: US/China relations sour:

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Technically and fundamentally, I think we are starting to see some real pressure building on GBP. Having hit a low of 1.2170ish yesterday, we saw a bounce as the USD fell as stocks regained some composure but the threat of a hard exit from the EU is back in the minds of investors and relations between the two seem as frosty as ever.

The EU is desperate to get the UK to agree to an extension but Britain realises that this is how the EU works; delaying tactics and pushing the issue into the distant future; hoping the problem (or Boris), goes away. But Boris is having none of that and is sticking to his timetable and so we edge closer to a deadline that the EU suggests they cannot meet. The technical picture (daily above) is just starting to show some early signs of growing volatility as the Bollinger bands start to widen but the trend down is also forming and I remain bearish. We do have some support down at 1.2160 that held well yesterday but a break there and we could be looking sub 1.2000 pretty quickly in my view. Of course, the USD is a huge part of the equation for Cable but I think GBP is going to struggle over the next few weeks still and the USD is looking very resilient.

As far as the talks go, there are scant signs of any progress and I am not hearing warm comforting words about getting this done. Just to rub some salt into the wound, the EC threatened the U.K. with a lawsuit for breaking the bloc’s rules on freedom of movement. The UK warned that the EU is at risk of failing to honour commitments it made in the Brexit Withdrawal Agreement to protect the rights of U.K. citizens living in the bloc. This is not going well at all at present but is this all part of the negotiating process; the art of the deal? That maybe the case but in the meantime, investors are getting nervous and rightly so and there is only one more round of talks before they have to decide if it is worth carrying on; that decision is due in June! This all comes as both parties economies are in tatters and facing an uncertain future and make no mistake, this is NOT good news for the EU either.

The latest round of talks end today with the U.K. refusing to compromise in key areas — most notably on the conditions the EU wants the country to accept in return for a trade deal but also on fisheries and on the role of the bloc’s courts. Barnier is due to update us on progress (or not) later today. To be honest it is hard to see a compromise here and so a climbdown may be necessary to get this over the line. It seems the EU is worried about a new competitor on the block as the EU argues that geographic proximity dictates it has to seek guarantees that the U.K. won’t try to undercut the bloc’s economy. I am sorry but if we are out, we are most definitely a competitor and should be free to act as one: tough; get over it. The EU is taking full advantage of the fact that the UK is tied to EU courts during the “transition” period. This is not helping and the mood seems like a stalemate but I am struggling to see any likelihood of compromise. GBP may well struggle for a while longer but I am not sure being long EUR is a great idea either. Yet again the USD looks the best of a bad bunch.

Meanwhile, as we all look to the nations that initially had the virus and were first to unlock their economies, the news is not great. Some Asian economies that had enjoyed success quelling the coronavirus, including South Korea and China, are now facing a fresh rise in cases that underscore the tough path ahead. In the U.S., Texas saw its deadliest day and its biggest increase in new cases since the start of the outbreak — two weeks into reopening. China data is still mixed at best with Industrial production showing signs of improvement in April but from a very low base, while retail sales figures were disappointing while China April Fixed Asset Invest came in at a disappointing -10.3% y/y vs -10% consensus. At the same time, Trump is threatening to cut off relations with China and said he did not want to talk to Xi. I am surprised stocks managed such a decent rally off the lows yesterday as I am struggling to see much good news. (More on the liquidity boost lower in this piece). Trump did not explain what he meant by cutting off ties but some officials want him to remove Chinese companies from US supply chains. This is not going well and could keep a cap on stocks for a while. Plus, Trump is talking of taxing US firms for manufacturing outside of the US!

These actions from Trump are a real concern for all of us as this is a direct hit to globalisation and the global economy. America cannot manufacture at anywhere near the same costs and the hit to the US consumer, as prices spike, would be huge. Trump said he was looking “very strongly” at whether Chinese companies should be allowed to list on US stock exchanges if they did not follow US accounting rules. But he said he knew that there was a downside to such a move. So, is this all posturing and trying to look tough for the electorate? I am not sure but he is playing a risky game as stocks do not like this talk and Trump does seem to be on a mission to walk back globalisation. But make no mistake, the US needs China and China needs the US but the timing of this latest spat with China could not come at a more fragile time and I think equity investors need to be wary about this US stance. US data continues to shock and Claims yesterday were no exception. The economy is weak and like everyone else, unless a vaccine is found the problems are probably not going away.

We will have 3 phases to this virus issue and we are past the first one which was the lockdown. Now the economy is in some form of transition as we digest the massive stimulus that has been seen from governments and central banks. Phase 3, which is probably about to start, will be the recovery and this is where the unknowns kick in and again, without a vaccine the risks are high that the recovery is slow and intermittent with setbacks along the way. One thing that it does not need is Trump bringing up the trade war again. The jury is still out on whether unlocking society is safe or not and to be honest the signs are somewhat concerning but governments desperately need economies back generating income. The bill for the rescue packages around the world is unimaginable. In the US, while more than a third of workers feel comfortable returning to work now, consumers are hesitant to resume many typical activities such as traveling, eating out or going to a major sporting event for some time. The path to recovery is rocky and uncertain and may take a lot longer to get back where we were and the health and psychological state of the consumer is paramount for all economies.

Stocks rallied yesterday and again it was liquidity that turned the markets as we saw the bond maturity of 183 bln MBS. This saw bank shares rise and energy names were also boosted by a rise in oil which has extended overnight. It seems liquidity is everything still but stocks were looking fragile yesterday at one point. I do not think Trump actions against China make buying here an attractive investment at all. This equity rally does seem to be lacking some basic fundamentals and seems rather speculative to me. After all, nearly 30% of companies have pulled guidance, as nobody has any idea what is coming; not even the Fed. Powell suggested no V-shaped recovery and in an interview with MNI, Bullard said the Fed may not have enough clarity on the economy by its June meeting to offer a quarterly forecast. Also the concentration in the top 5 stocks is startling.

There is a real danger in this concentration and if those 5 take a wobble then look out. On that, I note that a few countries are looking at digital tax for some of them and about time too.

Company executives are selling stocks. According to Bloomberg calculations, public companies have raised more cash in the past three days – from selling shares – than in any week in eight years. But buyers have been undaunted by warnings from either Fed Powell, who cautioned about unprecedented downside risk to the U.S. economy, from Goldman Sachs which said stocks could drop nearly 20% in the next three months, or by investing titans who say this is the most overbought market in history. No, these are retail investors who know better than even corporate management! This rally is very fragile in my view. The bulls point to the fact that the S&Ps rally from its March 2020 low to within 13.2% of its 2020 high has been primarily fuelled by the Fed’s monetary stimulus. The Fed has and continues to spend trillions to provide the economy with liquidity and to artificially prop up the markets. The question is if that is enough. I doubt it and in stock markets, earnings and sentiment matter. The Fed cannot create better earnings for companies and it can’t employ 30 million people either. It also cannot stop Trump going after China and wrecking the globalised economy.

Bull markets do not last forever and this time is not different. Consumer sentiment went from extremely positive with unemployment at an all-time low in 1929 to extremely negative by the beginning of 1930; sound familiar? The chart below depicts the sudden and significant decline in consumer confidence in April 2020 as compared to February 2020’s reading which was the highest since 2002.

Consumers worldwide are becoming increasingly pessimistic and are retrenching due to their concerns about being infected with the virus and also about losing their jobs. Ignore the state of mind of the consumer at your peril.

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Strategy:

Macro:.

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

Short GBPUSD @ 1.2335.. Add at 1.2415 Stop above 1. 2500

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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