Macro Dragon: Make Time for Europe...
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: Make Time for Europe...
Top of Mind…
- So been a pretty big set of wks for Euro-zone & Euro assets in general… not just from tactical break higher that we started to see in the Euro from last wk (accelerating structural breakdown lower in the USD that Dragon has been banging about)… yet from the France-German-Italy led recovery plans, to the massive fiscal spend in Germany (38% of GDP) & then ECB over-delivering yest…
- From an internal note to our VIP’s o/n on the ECB, from our CIO & Chief Strategist Jakobsen:
“600 bn vs 500 bn expected
Tenor extended to 2022 vs 2021 expected
No support for JUNK – fallen angles
ECB clearly don’t feel confident in neither EU economy or EU next week. This is big.
The impact + - for BTP, OW EU equity vs. UW US (Garnry note), EURUSD…. Higher now.”
- We now had a +0.93% uplift in the Euro to 1.1338 o/n… this is remarkable… i.e. just last wk getting above 1.1000 was herculean… & here we are over 3 big figures higher! We are up c. +4% from the 1.09 lvls of Mon 25 May 2020.
- This almost solidifies the DXY 96.677 -0.62% move for a potential close south of the next critical lvl of support 96.43, the 200WMA. After that its pretty much 94.00 to 90.00… a lot of potential freefall for the USD to come.
- Likely the only thing that can structurally turn the USD back up higher is Trump breaking the phase one trade deal with China, as a re-election strategy – which as KVP has said a number of times, has so many layers cakes stacked in his favor & would actually be positive for US assets (i.e. Fed/Treasury would be forced to step-up further, as would congress among others things). Don’t mistake USDCNH at 7.1100 lvls (from the ATH 7.1965) as things being all donuts & coffee between Trump & China… developments still in the works.
- So, make time for what is going on in the Eurozone as its quiet important & the divergences also within Europe will be that much more visceral in 6-12-18m time.
- We got some great works from Garnry comparing EU equities vs. their US cousins (i.e. advocating OW one & UW the other) as well as things like Adidas in relation to Germany’s fiscal policy moves.
- And yes, once again Super Friday with NFP & unemployment rate due… the expectation on the latter is 19.5%! Yes that’s not a typo… we are literally at 20% unemployment rate in the US of A… & yes, a majority of those jobs will come back… but some never will… if we get 75% of those jobs back by year-end… KVP will go out, buy a hat, pull the rabbit out the hat & make some rabbit stew, eat the rabbit stew & the hat.
- It was 14.7% last month. On the NFP its -8 million, it was -20.5 million last time. If this does not tell you there is a clear dislocation between what is driving the real economy & asset classes (Fed/Treasury liquidity & Fiscal support). For now the fundamentals in the economy do not matter… bad news is good news & good news is great news for market assets.
- The regime we are in is still exceptionally bullish & a structural decline in the dollar is a tailwind for risk-on assets… in particular across EM where names potentially could run for a while… once again, Brazil - flagging for the 4th & final time until USDBRL 5.1184 +1.05% o/n [it clocked almost USDBRL -6% over Tue & Wed]… is sub 4.500
- Lastly things like USDJPY 109.08 +0.23% (Moving against KVP’s structural yen strength thesis) has been breaking out higher, which likely a function of us being in the top range of US yields…
- …which in by itself is also an interesting trade i.e. US yields are capped in KVP’s view… whether that 100bp or 120p on US10s… from these +0.8085% lvls… it’s a structural asymmetrical position to hold, you get paid for a hedge against risk-off, yet your upside is infinity in a world where we are almost certainly to see official YCC in the US & negative rates are much higher probability in the US than people think (In KVP’s mind, they are almost also a certainty… it’s the timing & sizing of course).
- Also note the divergence between the VIX & the MOVE...
On The Radar Today
- JP: Householding Spending, Leading Indicators
- AU: AIG Services Index 31.6a 27.1p
- UK: House Prices
- EZ: German factory orders
- US: AHE, NFP -8me -20.5m p, U/R 19.5%e 14.7%
- NZ: Milk auction this evening
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