Chief Investment Officer
Summary: Markets are starting off the week in a negative mood after the US Congress failed to agree to a large rescue package late Sunday and despite news of a massive German fiscal boost on the way. It promises to be another hectic, roller coaster week ahead as authorities mount an escalating battle to get ahead of the credit contagion from the Covid-19 outbreak
What is our trading focus?
Trading focus is squarely on stocks, treasuries, the US dollar and oil after markets opened this week in a negative mood and US equity futures went quickly limit down after the US Congress couldn’t agree on the terms of a rescue package for the economy late Sunday. This keeps our focus squarely on when the deleveraging across global markets stops and in particular, when the US dollar turns lower.
What is going on?
Germany announced a large stimulus package over the weekend at up to 10% of German GDP as the country is finally set to engage the state of emergency required to abandon constitutional limits on deficit spending.
Covid-19: German chancellor Merkel entered isolation after her personal doctor was diagnosed with Covid-19. A staffer for US Vice President Pence tested positive and US Senator Rand Paul tested positive.
US St. Louis Fed President Bullard says that the US jobless rate could go to 30% and that US GDP in Q2 could risk dropping to -50%, figures that are multiples of the worst data since the Great Depression.
Nordic funds halt redemptions: In Sweden, Denmark and Norway, a number of high yield corporate lending funds halted redemptions as there is suddenly no market at present for the instruments in their portfolio were they forced to liquidate holdings.
Mexico cut its policy rate 50 basis points to 6.50%, joining other EM central banks in similar moves, even as the Mexican peso has devalued as much as 25% from recent highs against the US dollar, taking USDMXN to its highest level ever near 24.75.
RBNZ starts QE - in a surprise announcement, New Zealand's central bank announced NZD 30 billion in QE to deal with the Covid-19 emergency. The country has also announced a Covid-19-related total shutdown akin to the strictest measures in Europe.
What we are watching next?
The US rescue package – it must come Monday, it must be large ($2 trillion to start, but perhaps more important to extend an open-ended commitment) and it must provide cash to households and small businesses to keep these important economic actors ready to resume their economic output once the Covid-19 quarantines lift.
Fed to broaden purchase types? US Minneapolis Fed president Kashkari said in an interview over the weekend that the Fed can do more to bring stability, including purchasing corporate and municipal bonds. This could be contentious with Democratic US lawmakers, but is a massive area for concern as the US corporate lending market is on its knees after blowing a bubble in recent years. Commercial mortgages are another area of potential systemic concern.
USDCNY – while USDCNY has traded with a percent of its high for the cycle in 2019, but has been quietly managed by China relative to the wilder gyrations elsewhere. Any sign that China is abandoning its commitment to CNY stability and strength is an added global risk in an already touchy environment.
Calendar on Monday (times GMT)
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
