Chief Investment Officer
Summary: Equities stumbled badly last week and closed near the lows for the week in the US as most European bourses were closed Friday for a holiday. The negative sentiment continued overnight to start this week. Elsewhere, the US dollar has firmed and the offshore renminbi is near the cycle lows versus the US dollar as US-China relations are clearly deteriorating.
What is our trading focus?
What is going on?
US-China tensions are growing as Trump administration officials and the president himself increasingly point the finger of blame at China over both the origin of the Covid19 virus and claims over their lack of transparency during the early phases of the outbreak. Trump raised the idea of tariffs on Chinese goods and on Thursday raised the idea of forbidding US government retirement funds from investing in Chinese equities. A leaked Republican playbook for taking an anti-China stance to score vote.
US investment legend Warren Buffett announced that he has dumped all of his US airline stocks holdings. Buffett’s Berkshire Hathaway held around 10% of the four largest listed airlines and announced that he had sold all holdings at the Berkshire Hathaway annual general meeting (AGM). Buffett said that “The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way.” Another important point from the AGM was that Berkshire is not looking to do any acquisitions but instead preserving cash as Buffett and Munger talked about this being an unprecedented event that is impossible to forecast with any certainty.
Asian equities were in for a very weak session overnight as they caught up from Friday holiday closures with negative action from in the US Friday and perhaps as they eyed US-China tensions overnight. The Hang Seng index was down almost 4% this morning and India’s Sensex down nearly 5%.
What we are watching next?
Big miners report earnings – Gold giants Newmont Corp (NEM:arcx) on Tuesday and Barrick Gold Corp (GOLD:arcx) on Wednesday to give us further clues on the state of the industry and the precious metal market in particular. Also reporting earnings are Kinross Gold Corp, Iamgold Corp, Pan American Silver Corp. and Kirkland Lake Gold Ltd. Investors will also be seeking clues about how the pandemic will effect growth plans from the world’s top diversified miners such as Anglo American and Rio Tinto Group
More Q1 earnings – this week the most important earnings that could impact sentiment are Disney (Tue), Regeneron (Tue), PayPal (Wed), Shopify (Wed), Uber Technologies (Thu), Booking (Thu) and Siemens (Fri)
US-China relationship – we noted this concern on Friday on several remarks by Trump himself and others in his administration, particularly US Secretary of State Mike Pompeo. The situation on the renminbi exchange rate is potentially the most pressing, with considerable suspense ahead of Wednesday, when China is back from holiday.
US Apr. ISM Non-manufacturing and US employment data. The March-April data cycle will be the worst for the USA in terms of rate of change to the shock of the Covid19 crisis and sets the bar of the shape of the recovery as May will see considerable opening up from shutdowns across the US. We watch the ISM Non-manufacturing survey and subcomponents for benchmarking the state of the US services sector, but even more so the Friday US employment report. Bloomberg expectations for the US Nonfarm Payrolls change for April is running at -22 million, more than 20 times the worst ever single month reading, and the unemployment rate expected to rise to 16.3%. The US April ADP private payrolls survey is up on Wednesday and is expected at -20 million.
Economic Calendar Highlights (times GMT)
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Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
