Macro Dragon: The "Sniffles..."
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.
Macro Dragon: The "Sniffles..."
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…
- The “sniffles” is apparently what some country presidents in EMs (such as Brazil) are calling the Coronavirus – which has lead crime lords in Brazil’s infamous slums, enforcing their own curfews & stay at home orders to protect the populace, whilst cementing their positions further.
- Whilst KVP believes that officially its only one of G20 world leaders who has a confirmed cases of the Covid-19 - Bojo. Merkel is still in isolation after being in contact with her doctor was later tested positive – unofficially its likely closer to 25% (5 / 20 of G20). Point here is there is still many world leaders that are just not taking this seriously enough & to be out among the populace shaking hands & hugging people, when we should be working on physical distancing – it just so sends the wrong signals.
- Most of us are not wired - let alone incentivized - to make near-term sacrifices, for longer term benefits – i.e. to take into account the 2nd & 3rd order affects. And this is the paradox of life, the most successful people KVP knows live in the world of 2nd & 3rd order effects. To paraphrase the words of a leviathan trader that KVP knows, “we are all sitting here around this table & having a good time, yet we are not really all sitting here around this table – having a good time”.
- Great to see the likes of India’s 21day shutdown (not saying without turbulence, there is very little seamlessness in situations like these unfortunately) & pockets of African leadership from the likes of Ethiopia’s PM Abiy Ahmed Ali, & Ghana’s Finance minister, Ken Ofori-Atta
- Speaking of signals, say what you want about Trump’s continued mismanagement of the Covid-19 case in the US (from we have it under controlling it’s no big deal, to we are shutting down, to we are back to starting by Easter Sunday, to an extension of the lock-down in parts of the country to the end of April, to this could be 200K of deaths maybe more), his poll numbers are going up!
- In fact NPR Politics flagged his approval rating is the highest it has been since being elected at c. 47%. An outlier Gallup poll had him at 60% approval rating of his handling of the virus & a 49% job approval rating. All this the paragon of inverse expectations from the experts. Must be tough for Biden & team Dems, i.e. how do you tell your story when its all about the coronavirus.
- Back to markets, the upside continues as we put in another impressive +3.4% o/n on S&P cash to 2627 – if you recall from last wk’s piece we are now just outside of that key Fibo retracement range of 38.2% 2650 & 50.0% 2793 from the lows. So far the peak to trough has been c. -35% & we are an impressive +20% from the lows.
- You know the Dragon’s view… lows are likely not in until at least mid to end of April - that timing being a function of peak velocity of the outbreak in the US that KVP feels the mkt is still missing. We are now basically +20% from the Mar 23rd 2192 cash lows. Still feel this is month/quarter end flows & rebalancing, plus a continuation of short covering are near-term risks. Lastly, still feel there is a massive underappreciation by the market on just the scale of the dislocation that the economy still has to go through, you have Fed member such as Bullard (one of the few who has a reputation for calling a spade a spade) who says unemployment in the US could hit 30%.
- Could KVP be wrong & the lows in equities are in? Of course… & kudos to those who have been nimble enough to cover shorts, play the upside, do both etc. Bear market or no bear market.
- KVP script would be sticking with the rest of the plan, would be picking up OTM 20-25 delta puts on the SPX & RTY here (At least 3m, with the idea of either taking profits or cutting loses by E-of month 2), whilst also picking up a basket of Dollar Long calls (similar terms) – we’ll know by E-of April / early May if the Dragon totally missed the boat on the equity floor. And of course, high convictions loosely held, as critical components of a situation changes, so potentially should one’s views.
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.
@SaxoStrats | @KVP_Macro
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