Good morning.. A huge surge in stocks and we are higher again this morning but we are some way off an all-clear, no vaccine has been found and businesses will take a long time to get back to full capacity and millions are still losing their jobs. I get markets look forward but I think they are looking through rose-tinted lenses. This is a big move and it stopped me out of the S&P recommendation at 2260 but as the equity markets rally, one would have expected a serious sell-off in the USD; but no. There still seems to be some concerns in the funding markets and just why would the IMF be mulling over a programme to supply USD to economies? Are the Fed swap lines not enough still? On this basis, it is hard to see the USD falling far and with all the existential issues facing the EU (Finance ministers meeting today), it is hard to get bullish the EUR. Pelosi is calling for another $1trln in support (no all-clear there then) and gold immediately went bid. We may see gold higher (see below). Stocks are sucking in investors rapidly on this hope move. I would like a few more facts.

Keep the Faith..

Data.. All Times BST

09:00.. Italy Retail sales mom Cons: none Prev 0.5%

15:00.. Canada IVEY PMI March Cons: 41 Prev 54.1

20:00.. US Consumer Credit Cons: 14.0 Prev: 12.0

14:00.. Eurogroup Meeting via Teleconference, Lagarde due to participate

Details 07/04/20

Stocks hear the all-clear but as they surge higher the USD stays bid!

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You can say what you like about the rally in equities yesterday but one thing is clear; it was a strong move without a step backwards and seemed to price the all-clear as a potential peak is finally seen in Italy, possibly Spain and possibly NY. The only problem I have with all this is that a dip in deaths does not mean we can all return to work or any form of normality yet but I guess the bulls will say that equities are forward looking. There is a lot of hope priced in now at what seems like a very early stage in what will be a long process of recovery and shocks are still on the agenda. We have no vaccine yet and an early unlocking of the shutdown could see a second wave hit. I do think we need to be cautious here and Trump certainly seems overly keen to open up again. I think equity markets seem to have forgotten that millions of people are losing their jobs and livelihoods and firms are not suddenly going to hire them all back again.

The New York Fed survey of consumer expectations showed that virtually every metric having to do with one’s financial well-being – income, wealth, debt sustainability and earnings expectations – are collapsing.

For example the expected probability of losing one’s job jumped to an all-time high of 18.5%; the probability of missing a minimum debt payment over the next three months surged to 15.1%, and expected earnings growth tumbled to just 2%. It puts a rather warped perspective on this equity rally but I guess equity investors are also cognisant of the Fed’s massive liquidity injections. It is this which has seen expectations for stocks increase markedly in the Fed survey.

I am not sure one can call the bear market over with so much optimism at this point. Bear markets finish when all that optimism disappears.

But the rally was impressive to say the least and it took me out of the short S&P recommendation at 2620 and we saw an impressive close near the highs. But while equities reversed, it was interesting to note that the USD stayed bid, which I am sure caught a few people out. The issue is that there still seems to be stress in the USD funding market, even after ALL the Fed is doing to add funds via swap lines. I also note the bounce in gold and with all the central banks are doing (debasing fiat currencies) I think this is another signal that the all-clear should not be sounded. This looks set to move higher again to me and there seems to be a shortage of the physical as spreads with futures widen dramatically.

Gold rallied after US House Speaker Pelosi said she wants the next economic relief bill to be at least $1T; wants more small business loans & more direct payments. More coming and gold is bid. No all-clear there then if they need another $1trln.

FRA-OIS spreads seem to be pushing up again and look at Libor. April libor is 1.28 with Fed funds at 6bps. This is the highest libor since February. Something is wrong here. If this stress does not ease over the next days or so, with all the Fed is doing, then we have to start assuming that something is broken again and I will be keeping a close eye on bonds and bond vol again from here. FRA spreads were expected to fall steeply after all the Fed is doing so keep an eye on this. The USD should have fallen yesterday. With all the positivity is stocks, EUR only managed a rally to 1.0830 and shows just how pressured EUR is becoming. GBP took a hit (and EURGBP rallied) as it was reported that PM Johnson was in an ICU and there are some real concerns about his wellbeing now. They say he is in contact with Cabinet but if he goes on a ventilator (I hope not) then he will be deeply sedated. But across the board, the USD move was stunted at best considering the huge relief rally seen in risk. But with the relief rally in stocks, we still see stress elsewhere as sovereign risk continues to rise as the US talks more stimulus/spending.

The US government is not anywhere near pulling back and are clearly concerned about the state of the US economy and rightly so. Shouldn’t we be as equally concerned? There is a danger that the Fed swap lines are not enough to quell the demand for USDs. Is the USD going to be the problem now? With this and the structural issues facing the EU, I think EUR is still a sell on any rally.

US banks are now finding themselves in a situation where homeowners don’t have to make mortgage payments for few months, and renters don’t have to pay rent for a while, which leaves many landlords unable to make their mortgage payments – not to speak of the many Airbnb hosts that have no guests and won’t be able to make their mortgage payments. Commercial real estate is in turmoil because the tenants have closed shop and cannot or won’t make rent payments, and these landlords are going to have long discussions with their bankers about skipping mortgage payments. Subprime auto loans and subprime credit card loans, which were already blowing up before the crisis, are now an unspeakable mess, as tens of millions of people have suddenly lost their jobs. Is there a danger that a bank or two may be in trouble and that is why the funding markets are so tight? Also, why is the IMF mulling a programme to supply dollars to economies? Maybe the Fed swap lines are not enough.

I saw this from the New York Fed and the FDIC who wrote the “Value of Opacity in a Banking Crisis,” explaining, supported by empirical data from the Great Depression, that it’s better to stop disclosing balance sheet information about individual banks. Really; why not? Well, I guess it is because big corporations and businesses in general have far more cash at the banks than the insurance covers and they do not want then yanking that cash out in a crisis. The question is whether we have a banking crisis or not? Something seems broken or at the very least cracked. The authors of the article, a joint production by the FDIC and the New York Fed, cite Great Depression data before the arrival of FDIC deposit insurance to show how lying about balance sheets of individual banks is beneficial in ending runs on weak banks. They’re talking about accounts that were uninsured at the time, and that’s the key for today; amounts over and above the FDIC insurance limits. The New York Fed concludes: Consequently, our results are relevant today and demonstrate there is value in having regulators suppress bank-specific information in a crisis as a way to stem runs on those banks by depositors and other types of investors. No wonder the Fed has gone all-in. Do we have a problem? They sure aren’t going to tell us.

There is a real danger of massive defaults as people lose their jobs, especially in the US. Investors have beaten a retreat from the $1tn US market for bonds backed by car loans, credit cards and other consumer lending, as a sharp jump in unemployment threatens borrowers’ ability to pay them back; according to the FT. So far this year, yields on low-rated bonds backed by car loans in the US have quadrupled to 8 percentage points over benchmark rates, according to data from JPMorgan, implying heavy selling pressure. Meanwhile, the flow of new bond deals backed by consumer loans has dwindled. During the last financial crisis, credit card defaults coincided with the peak in initial jobless claims in March 2009. Auto loan defaults peaked slightly earlier, in December 2008. There are still shocks coming from this virus fall-out. Stocks look a little rich to me and this euphoria my be short-lived and the USD is a concern now.

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Strategy:

Macro:.

Short EURGBP @ 8901.. Stop @ entry now (took substantial profits at.8760)

Short S&P 2558 Stopped at 2260.

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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