Good Morning.. The rally in stocks faded fast last night into the close on Wall St and I think the rally was a short squeeze within a bear market as the fundamentals have not changed at all. Nikkei closed stronger on the back of the Abe package but HK and Shanghai are lower with US futures. The shorts are now out. I think stocks have more to do on the downside today and we got nothing from the EU Fin min meeting taking place as they cannot agree on anything. Even the chief scientist to the EU has resigned voicing concerns of disunity. The fractures in the EU are coming to the surface and all I expect from this Fin Min meeting when it does finally agree on the wording will be a weak fudge as usual. But time is running out for the EU as these fractures are getting wide enough to breach the dam. We have a small exposure short EURGBP still but I have added a shot EUR recommendation this morning. Politics will test the unity to its foundations and there is nothing the ECB can do about that.. Also, stocks look high to me so USD strength maybe back.. No data of note barring Norway CPI this morning..

Keep the Faith..

Details 08/04/20

Bear market rally or something more lasting? The existential threat in the EU is very real. Going short EUR.

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I think the title has been the question being asked at many an asset manager meeting in the last day or so as the likes of the DAX bounce back into a technical bull market, having risen 20% off the lows. That is a big move but are we out of the woods yet? Bear markets often have strong and meaningful rallies, as we can see clearly from our historical charts and while looking back is no guarantee of what may happen this time around, the fundamentals remain the same as when the crash began. The global economy has stopped dead in a heartbeat. The implications of such a shock are not going to be repaired anytime soon and while we may not make new lows (who knows), there is still a significant chance that this rally may not last, as suggested yesterday. For me, the issue is still what impact this has on the global consumer and how we come out of this period of lockdown. Businesses are not opening and people are not being re-employed; we have just seen a shift in some numbers and this is not just about peak virus; it is about manufacturing and services recovering and for that we need demand. That demand is NOT about to resurface in a hurry. I think US equity markets suddenly realised that late in the session last night. It was a weak close as it dawns on investors that the Fed and central bank actions are just to tide us over for a short period. Even the CBs suggest these are not stimulus measures.

I hear many people suggesting that the VIX has topped out and so the stock market base is in but let me assure you the markets could fall further with the VIX not rising much if we start trending lower in a more orderly fashion.

There is every chance that we do have a longer bear market developing as sentiment plays a huge role in financial markets and on the consumer; and sentiment is shot to pieces and will remain so. There is a chance that lockdowns do start to end but it will take an age for things to return to any kind of normal and quite a few investors have had a bad experience and will not re-enter the market as millions will be out of work. That is not going to change anytime soon. This is the key feature to focus on now and not peak virus. Here are a couple of words that you don’t hear any more: “Goldilocks economy” and the danger here is that the Fed is going to struggle to prop up markets with QE and liquidity pumping in the short end. We have seen proof that QE does not work because creating cheap loans, as indeed Japan and the EU have tried and failed with, needs demand. There isn’t going to be any, especially among the millions of unemployed or bankrupt businesses, of which there will be many. The full impact from businesses on the credit space is still unknown and the loan defaults are yet to come. Bear markets rarely end so soon; the real damage now will be a long slower move lower.

The truth is that for all the highly convicted debate out there on this market sell-off, especially among the bulls (none of whom foresaw this crash but are now absolutely certain it is ending) nobody knows what happens next. Especially since following the Fed’s latest barrage of market bailouts, any link between asset prices and underlying fundamentals has been completely severed and replaced with Fed promises, backstops and excess liquidity, which is keeping all risk assets propped up artificially at least until a new round of questions about Fed credibility emerges. What if, after all the Fed has thrown at this issue (just as the ECB and BoJ did and continue to do so), markets continue to fall and companies fail? The Fed has our back; right? They certainly have thrown just about everything they were allowed to throw at this issue and some! It is not just the Fed throwing everything at this issue (which makes me think we are not in the clear yet) as many others keep trying to fend off the inevitable. Japan is trying to do more with yet another spending spree and this propped the Nikkei up last night (up 2.3%) but HK and Shanghai were lower.

Rating agencies are starting to take a look at sovereign ratings and S&P lowered the outlook for Oz last night to negative from stable. They should take a long hard look at the US on that basis.

To my mind the short specs are out of this trade now through yesterday’s early rally and that means a fall could be deep and meaningful. The Fed is going to be very busy. It is being estimated that unemployment in the U.S. is already higher than it was at any point during the last recession. That means that millions of American workers no longer have pay cheques coming in and won’t be able to pay their mortgages. On top of that, the CARES Act actually requires all financial institutions to allow borrowers with government-backed mortgages to defer payments for an extended period of time. Of course this is a recipe for disaster for mortgage lenders, and industry insiders are warning that we are literally on the verge of a “collapse” of the mortgage market. That is going to put stress back on the repo markets too and some may be reluctant to lend to some banks and non-bank lenders may be hugely exposed to all sorts of NPL’s. I am not convinced at all that all the bad news is out and the rally looks like a squeeze to me.

Small businesses face an existential period ahead. The NFIB Small Business Optimism Index fell 8.1 points in March to 96.4, the largest monthly decline in the survey’s history and ending a historic run of 39-months of strong small business optimism above 100.

Nine of the 10 Index components declined, which is evidence that economic disruptions are escalating on Main Street as small businesses struggle to keep their doors open. The small business sector is anticipating and bracing for continued economic disruptions going forward. They need help and so do the employees. The latest survey showed 92% of small employers are negatively impacted by the outbreak and about half of small employers said they can survive for no more than two months under the current business conditions.

Meanwhile, EU Finance Ministers failed to agree to any form of Euro-bond but I guess we knew that was coming before the meeting started. After a 14-hour on-off teleconference — most of which was spent in bilateral chats between Eurogroup president Mário Centeno and small groups of ministers — participants were struggling to agree on how to deploy the bloc’s bailout fund to disperse loans to struggling economies and whether to ditch the subject of corona bonds once and for all. It was a familiar tale of two resisters. Italy’s finance minister Roberto Gualtieri said his government would not accept a final report sent to EU leaders unless it explicitly mentioned debt mutualisation as a tool for the economic recovery. Rome also demanded that any use of loans from the European Stability Mechanism come with no conditions attached. The Netherlands’ finance minister Wopke Hoekstra said no on both points. But it is interesting that there is a lot of frustration within the EU on this and the subject of any coordinated reaction to the virus. I will happily recommend selling the EUR up here at 1.0870 with a stop at 1.0940ish and the crosses look heavy again to me; the EU is in deep trouble here and the EUR is about to face a similar crisis of confidence.

The EU’s most senior science chief has resigned after failing to persuade Brussels to set up a large-scale scientific programme to fight Covid-19. They can’t agree on a bond to support the weak in the union and now cannot coordinate a joint effort to deal with the virus on the ground! What is the EUR doing up here? “I have been extremely disappointed by the European response to Covid-19,” he said in a statement to the Financial Times. “I arrived at the ERC a fervent supporter of the EU [but] the Covid-19 crisis completely changed my views (like so many before you mate), though the ideals of international collaboration I continue to support with enthusiasm.” Prof Ferrari lamented “the complete absence of co-ordination of healthcare policies among member states, the recurrent opposition to cohesive financial support initiatives, the pervasive one-sided border closures” in the EU. (Preaching to the converted). We are expecting a press conference from the Finance ministers at 09:00 BST this morning. “Corona bonds has to die if we are to get a compromise,” said one northern eurozone diplomat. There is NOT going to be a wealth transmission mechanism; no EU bonds; no EU in time. If I was Italy I would default on the debt or seriously start talking of leaving. Today, not a single European country is doing well which means there is limited willingness for European countries to come to each other’s aid. They are busy dealing with their own crises. Just witness how Italy has been left alone with its crisis by Europe and now rather gets its medical support from China.

What we will get it seems is a reduction in the collateral that the ECB can buy, including Greek bonds. Basically you can now dump the equivalent of old mattresses and broken wheelbarrows at the ECB and they will give you cash. It’s like a giant skip at the ECB now. But as they have found out before, this may not work as creating cheap loans requires demand and they do not have the demand for loans at quite a few levels. Consumers are facing a crisis and the last thing they want is more debt. But it is the political shifts I see coming due to the lack of support for the southern nations that will finally see the EU stressed to breaking point. The lack of harmony in this union is clear for all to see now. It was a dream created by the strong for the strong and they have been feeding well on this for decades at the expense of the weaker nations. The political backlash is coming. Investors need to realise that now and the fact that there is NOTHING the ECB can do about it. French President Macron warned his fellow EU leaders that the coronavirus outbreak risked undoing the bloc’s central pillars if they failed to show solidarity in this crisis. “What’s at stake is the survival of the European project,” he said. For once an EU politician speaking sense but I think they just blew it and the IMF is not big enough to bail out the whole of the EU. Cracks are starting to appear.

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Strategy:

Macro:.

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

Short EUR@ 1.0870.. Stop above 1.0940

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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