Good morning… So no agreement yet from the EU and to be honest, bickering over €50bln of grants seems to be missing the point. This is about the opportunity to secure the EU and the EUR on the global stage. It is only a one-off payment and will not fix all the issues in the EU but it was a chance to build a more solid belief in the future of the union; it must not be squandered. I think they may get a deal but I hope there are no veto’s allowed. I do think a fair bit of this may now be priced but EUR would have been higher if they had agreed Saturday. We need to see what the final compromise is. Elsewhere some concerning signals from China as the State takes over 9 financial institutions due to high risk and I do wonder if the mighty 5 tech stocks may be subject to some profit taking now. It’s about time and there are signs of rotation. Recommendations remain the same but I do think a break of recent highs in EURGBP at .9175 could open up a decent rise.
Keep the Faith..
Details 20/07/20
EU leaders drag out a decision on bail-out: Time to take profits on Techs?
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The trouble with the EU, apart from the fact that they can never agree to anything, is that at very best, a group of 27 members from such diverse economies who all have to agree to anything, will eventually always up with a weak compromise. If ever there was a chance for this group to re-establish belief in their ability to create a proper Union, it was over the weekend but alas, no, as we move into Monday with no agreement and more talks scheduled. This is a one-off payment, a sign of solidarity and commitment to the future and wellbeing of the EU and I am astonished they are bickering over whether the payment should be €300, 350 or 400 bln for the whole group. Anyone would think the Netherlands, Austria and Finland were footing the whole bill. There is some chatter that an agreement on grants could be close and sits at €390bln but we shall have to wait until the meeting this afternoon scheduled for 3pm London time.
This is disappointing and I am not sure the dissenters seem to have grabbed what a chance they may be missing. We may still get a deal over the line but it is unlikely to be the 500bln of grants and 250bln of loans. A “frugal” alliance of Austria, Denmark, the Netherlands and Sweden told other EU states they wanted to scale back proposed grants from €450bn to €350bn, coupled with another €350bn of loans, in a recovery package worth €700bn to help fight the coronavirus. Even if this is on the back of looking tough back home for their domestic voters, that is not good enough when Von der Leyen has made it clear how important this deal is. “This is the time” she said but here we are starting to doubt the outcome again. Apparently, during the summit dinner, Italian prime minister Giuseppe Conte said failure to strike a deal would lead to the “destruction of Europe’s single market”, according to diplomats.
I do think we shall get something as it seems clear Merkel and Macron do not want to delay this until after the summer and rightly so. If this is not resolved soon then a lot of credibility in this arranged marriage in the EU will be gone for good. It shows how desperate the EU needs to become a proper Union like the US or UK who have a central government and opposition parties within them. But it is the lack of any sense of urgency that keeps tugging at me with these politicians sitting in their “Ivory Towers” and frankly many still seem more concerned with domestic image rather than the greater goal. I guess that is the case with most politicians but I really do think the EU is going to miss Merkel when she goes. If they are seriously wrangling over €50bln difference to help cement the future of the EU then they all need locking up! If Rutte gets his way with wanting a veto on the spending, then in my view, the whole thing is a waste of time. The lack of commitment to this project is stunning.
Meanwhile, it seems to me that we are seeing outperformance in Asia as the MSCI Asia Pacific Index has climbed about 9% since the end of May through last week, compared with roughly 6% gains by both the S&P 500 Index and the Stoxx Europe 600. This is due to the emergence of Asian economies from the virus and Chinese growth recovering and I am wondering if we may see some substantial capital start leaving the US in front of an election that may put Biden in the WH, who wants to ramp corporate tax rates back to where they were before Trump slashed them. It is a compelling argument even though virus cases in Japan, Australia and India are still a concern and talk of a lockdown in LA and possibly Barcelona doing the rounds.
Asian stocks have outperformed those in the U.S. and Europe since the end of May
If this capital does start moving, then the USD could be on a trend lower and the early signs of that have already been seen. I think a deal in the EU on joint bonds, if agreed, could see more capital headed to the EU. But the UK still has a few clouds hanging over it and so I still think we may see more EURGBP upside from here.
A break of the .9175 highs could see little standing in the way of a decent rise.
However, there are some concerns over the health of the Chinese financial sector and some concerning events have taken place with Chinese financial regulators taking over a record nine financial institutions which they said broke rules and added risk to a financial system facing increasing headwinds from the coronavirus pandemic. We have had stories of runs on banks in China. Perhaps the two are in fact connected and if faith in China’s financial system sinks and more money is pulled out of the country’s insolvent banks, more banks will be bailed out or nationalised. It does seem that there is some stress in financials and the authorities are trying to plug the dam. The takeovers of four insurers, two trust firms and three securities companies that managed a combined 1 trillion yuan ($143 billion) in assets represent Beijing’s first major regulatory move this year and follows the extensively documented bailouts of several regional lenders last year.
Among the companies taken over by the China’s Banking and Insurance Regulatory Commission are Huaxia Life Insurance Co., Tianan Life Insurance Co., Tian An Property Insurance Co. and Yian Property Insurance Co, the regulator said on its website. I would caution that China’s stock market has had a great run but I do think other parts of Asia are attracting capital also. I also think we sit near the top of the range in US stocks and may start to look a tad tired. On the S&P, the 3235-50 area looks to be the level we would need to break and would confirm the range if we fail.
But I do note the Bollinger bands starting to widen and the MACD is positive. This could be a critical level for US stocks. If we look back to June, we saw a similar picture only to fail badly and the virus still has a strong hold on the US and markets are starting to focus on the election. The grass seems greener elsewhere to me as earnings season gets fully underway and this was a blowout quarter and unlikely to be repeated.
What is fascinating is research that suggests that over the past three months we have seen a fascinating market timing phenomenon, one which during the last 10 weeks amounted to a “risk-free” trade: S&P500 returns during the day session have been flat as a pancake since the start of May, while over the same time period, gains during the overnight session have been a diagonal line, accounting for all of the market’s upside since May 1, a whopping 314 S&P points.
Research from JPM highlights this phenomenon and it appears many have figured out that buying the cash close and selling the cash open is all one needs to generate a roughly 40% annualised return, while ignoring all that other anachronistic investing trivia such as news, data and fundamentals. What a world we live in! JPM believes that the arrival of news has been more important during after US hours or during European regular trading hours. This is not only because important economic data such as Chinese and European PMIs are released during extended US hours, but also because virus news emanating from Asia and Europe, regions that have been ahead of the US on the virus curve, have been important market drivers in recent months.
Are tech stocks about to roll over in the US? There certainly seems a good case for some profit taking and signs are there of some rotation away from the top 5 names. A reversal of roles took place in the stock market last week: The “Giant 5” combined – Apple, Microsoft, Amazon, Alphabet, and Facebook – had a lousy week. And the FANGMAN, which includes Netflix and Nvidia, shivered. But the rest of the market rose. Is this an early warning or Canary in the coalmine?
If you look at the Wilshire 5000 index (all stocks) minus the big 5 tech stocks then you can see that most US equities have done little since 2018. The concentration of these stocks is dangerously high.
After a run like we have seen, some profit taking at least seems to make some sense and it seems the highly speculative retail investor is now extremely long. On Friday July 17, the “Giant 5” was up +14.5% from February 19, while the “Wilshire 5000 Minus Giant 5” was down -8.6%. But note the reversal last week:
The weight of the Giant 5 in the overall stock market has surged from 10% in January 2017 to 20.4% on Friday July 10 – just five stocks! But the decline of the Giant 5 over the past five days, and the increase of the rest of the market caused their weight to drop to 19.5%. Is a shift taking place here? I think we need to keep an eye on this.
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Strategy:
Macro:.
Long EUR @ 1.1210.. Stop at 1.1150
Long EURAUD @ 1.6250 stop at 1.6080
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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