Macro Dragon: PMIs, ISMs, AHE, NFPs, End of Quarter/Month…
Global Macro Strategist, Saxo Bank Group
Summary: Macro Dragon = Cross-Asset Daily Views that could cover anything from tactical positioning, to long-term thematic investments, key events & inflection points in the markets, all with the objective of consistent wealth creation overtime.
We rehash the active & economic data heavy week ahead, as well as touch base again on the likely few main focus points of the markets this week: 1. Potential Month/Quarter end re-balancing. 2. latest Covid-19 number showing that the US & IT (& also soon to be Spain) have eclipsed CH confirmed cases of c. 81,500. The US is approaching 150,000. 3. Latest policy Response. 4. Economic MtM starting to get in - but watch for potential China upside on Tue Asia, Mon night US
Macro Dragon: PMIs, ISMs, AHE, NFPs, End of Quarter/Month…
Folks as a pin going forward during this turbulent times, let us please remember:
The Covid-19 crisis with all its challenges, stress, chaos & opportunities will also eventually pass. What defines humanity & ourselves as individuals is how we both individually & collectively act under adversity. Think of how you want to look back over this period, doing your part to keep your family healthy, society healthy & functioning. Keeping a cool head, when others are losing theirs, maintaining an objective list of positive aspects & negative aspects of the policy responses & economic shock the world is/could go through. And lastly gratitude, sympathy & empathy for one another. Asia got/is getting through this & RoW.
The one big positive from all this, is it reminds us we are all One & we are not at the top of the food chain. Covid-19 does not care if you are rich, poor, what your ethnicity & skin color are, what passport/s you hold, nor what you age or profession is. Our greatest achievements are almost always those that we collectively do with others & sometimes as in this case, as a species. Lastly keep your mind open to growth & opportunities.
Top of Mind…
- Lets get cracking on the wk ahead, as a rehash from our Fri piece this wk is really all about:
- 1. Economic data, with leading indicator final PMIs due – obviously we know they should be bad, whether or not they end up being movers may have to do if they are abysmal. I.e. a better than expected number likely does nothing – potential EXCEPTION China (Due Asia Tue morning, US Mon Night) which at 45.0e & 42.0 for mfg. & serv. from previous prints of 35.7p & 29.6, are still pretty high hurdles
- Yet a big beat & quarter month end potential risk on (if the equity re-balancing in-flow theme plays out) could see positive price action in the region. So watch AUD & NZD crosses, as well as markets like SK, HK, SG, TW & JP that have huge trade relations with China – potential read here is further confirmation of what we know, China coming on line & some light for growth in the Asia region in 2H20 (granted have to weight that with slowdowns in EU & US)
- 2. Continued focus on Covid-19 numbers, as now the US, IT & SP have surpassed China in confirmed cases - which is remarkable as from everything KVP can gather, the testing across the US is way off from where it should be. Remember folks the map is not the territory, especially when you see confirmed numbers in EM & FM – who just simply don’t have the resources & resourcefulness to even begin scratching the surface of who prevalent the coronavirus is, in their communities.
- We have already had Trump flag that deaths in the US could get as high as 200K… & that starts to get to seriousness of the matter. KVP reckons we easily have 1-2m confirmed cases in the US by end of Apr. If c. 20% of those end up in hospital, that’s 200-400k unevenly distributed across the country, for a hospital system of 650k beds (1m beds run at 65% capacity). So even if they can get hospital beds to 500K free – there is just not going to be enough equipment to go around. Plus, we still have a dislocation across states, on how the virus is being tackled which significantly increases the delta for flare ups later on. KVP would not be surprised if Trumps “aspiration” Easter date becomes pushed back. That’s also akin to common practice we have seen, govies start with 2wks, then extend those further.
- Key upside risk in equity markets would be where Trump’s love for the stock market, outweighs the recently frosty relationship with China – yet he could always take away the tariffs & dismantle the phase one deal. A game changer? No, yet it would help some US & CH companies out a lot & it could definitely be an upside squeezy day on equities.
- 3. Continued policy response to the Global Recession that we are now in (just has not fully shown up in the growth data yet), as well as discussions around rethinking the structural relationship between society & government. I.e. think universal basic income, parts of the remote work here to stay, some of the benefits we have seen due to the Covid-19 crisis (lower pollution), etc.
- KVP still thinks we can expect more policy response, especially on the Fiscal side where it is needed. Northern Europe needs to get off its high horse (I can say that being Scandie) & back Euro-bonds, or break up the euro now & learn to live with a much stronger Northern Euro, while the southern Euro devalues. Point here being, once the dust has settled properly – so think back end 2020 into 2021… the potential anger from the south with be unprecedented. Its will be akin to you have let our families & loved ones die, when we were supposed to be part of one European Union. So if you think we had seen the highs in euro skeptics, just you wait.
- Yield curve control also likely next move from the Fed on the front end of the curve perhaps 2s to 5s… this will damped volatility that will ripple into the rest of the bond asset class.
- The Dragon still feels we are in a bear market in US equities – hence the brutal & stunning rallies that we have experience - & we are more likely to make new & deeper lows, than to continue to climb higher. With that said, the Fed’s Colossus 23 Mon 2020 initiative to backstop the US Corporate Bonds market (Inv. & up) has basically turned that tranche into something akin to quasi-sovereign paper.
- LQD – the IG Bond etf that we had flagged before) returned +14.7% last wk! That’s equity moves in a bond fund. Other etfs worth paying attention to are the MUB (munis) +11%. Granted these names have run & are either at NAV or very close, compared to the massive discounts they were trading at, just 2wks ago. So if we do get a big move lower in equities, that lead to further liquidation across the board – we could see some pullbacks in LQD & MUB that could be worth picking up.
- HYG could be one to watch - HY that is not technically being bought by the Fed – if things continue to deteriorate & the Fed/Treasury extend their ring-fence down the credit sphere to sub investment grade.
We could continue to be in a gang buster period of volatility both to the up & down side until at least mid-Apr to back-end of May. Some, time decay is needed in the system, both from a Covid-19 spread (past peak velocity upwards), even bigger & even better government / fiscal / monetary policy response, to overall heads of governments giving this the 2nd & 3rd order consequences thinking that it needs. This to shall pass. Keep you minds & hearts open.
Good luck to everyone out there, be nimble & position accordingly.
@KVP_MACRO | @SaxoStrats
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