Macro Dragon: S&P Up this Year, What Covid-19 Crisis?
Global Macro Strategist, Saxo Bank Group
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: S&P Up this Year, What Covid-19 Crisis?
Top of Mind…
- Let’s start off with a Dragon plug or two: Worth noting that our view on adding on a trading clip on gold at the $1680 to be dashed out at $1700 played out beautifully – we are c. $1704 this Asia Tue’s morning, after getting to as low as $1675 yest morning. And yes, last wk the play was $1700 to $1720ish -which was literally a session play… again structural long-term bulls… yet trade the ranges with the Trading Clips of the overall position… save the Core Clips for your $2500 / $3000 / $4000 targets. For now the ranges remain: 1680 / 1700 / 1725 / 1745…
- And yes, been yodeling on BRL for while (got even more eye rolls on this than I did on NOK high conviction long pitch… “hello, hello… yes Brazil… yes LatAm… Rio… Carnival… Jiu Jistu… Football… yes.. the sniffles dude… yes I know foreign flows are going out… but locals moving in… hello?”… anyhow… the Brazilian real is starting to really loosen up as o/n BRLUSD futures clocked c. +3%, this is up c. +20% since flagging it to our VIPs a few wks back – note that is unlevered, so the actual return on capital is more like +100%.
- As always kudos to those that made the time to digest the views on this, REGARDLESS of whether it resonated or not – note how we are not even back to 50% fibo retracement lvls on BRL… just cleared 38.2% o/n. The only reason KVP got this right, was to reverse engineer what he got wrong in march + April. Recalibrate, adjust, execute, recalibrate, adjust, execute…
- …That is the way
- So What Covid-19 Crisis?
- Is clearly an interpretation that one can be taking from the markets, as not only do we continue to make ATH on the Nasdaq-100, the broader based S&P is now back to being in the black given the +1.2% to 3232 – ATH was set on 19 of Feb at 3386, right on the signing of the phase one deal & the wk before the public announcement of Covid-19 in China.
- It worth noting if you were reading headlines & watching the protests in the US, you would be thinking we are making all time lows instead.
- We also had this overnight from the Fed: Federal Reserve Board expands its Main Street Lending Program to allow more small and medium-sized businesses to be able to receive support. Which is interesting as they are on this wed!
- Whilst its clear there is a huge disparity between the underlying economy, as well liquidity & price action in the markets – some of the most recent data… massive jobs beat vs. expectations of further losses last wk in the US (+2.5m a vs -7.5m e), places like New Zealand completely done with their social distancing measures (is it just KVP, or do Kiwis always seem to consistently punch above their weight & still remain relatively egoless about it all?), majority of the DMs are in some form of opening or another… all suggest that it’s the economy to further correct upwards, rather than the markets to correct downwards - at least for now.
- At some point good news in the economy will be bad news for the markets, as it will take the pressure off of the likes of congress for further fiscal measures (both number, scale & speed) as well as allowing the likes of the Fed to take their foot a little off the accommodative accelerator – net-net, it could signal the best of easy liquidity is behind us & soon we will have to find a new equilibrium in the market.
- Don’t get the Dragon wrong, the Fed (& other CBs) can NEVER STEP BACK FULLY… its like an over protective parent who now needs to look after their kid from childhood to adulthood… decade in, decade out… because you never gave the kid the environment to form resiliency & grow by themselves...
- So any perceived or real pullbacks on Fed liquidity will likely be buying opportunities – that’s right, you actually want a hawkish Powell to give risk-assets some reversals (granted not sure where USTs go! Not a clear case in this current corridor).
- At some point we run into a situation like the BoJ did when they went negative rates... it works until it does not work – it marked the high in DollarYen & the bang for buck, became a fizzle for buck – but that could be months perhaps even years from now… likely one of the best metrics to watch is going to be the Fed’s BS to GDP ratio… once we start to approach 100%... (we were 6% in 2007, then c. 25% in Jan 2020, we are now 32.7% - although by some measures linked to the US treasury one can argue it should be higher)
- All about the Fed this wk in regards to known unknowns, plus all about whether we see YCC (yield curve control) from them this wk or later in the year.
- This is another thing we can say with high certainty bordering on + 90% which is exceptionally high in trading, let alone Global Macro… in regards to YCC it’s a question of when not IF. Time & time again we have seen hints on it being brought up by the Fed from the likes of Vice Chair Clarida to NY Fed’s John Williams.
- For those getting hung up on the terminology &/or never really traded rates & bonds, just think of YCC as putting a ceiling on yields – i.e. to synthetically hold the cost of capital (debt) lower, providing easier access of liquidity to the economy, as well as allowing the government to raise more debt at lower yields than could potentially be the case.
- So look out for our Market Call today where our CIO & Chief Strategist Steen Jakobsen, our Commodity Strategist Ole Hansen & Equity Strategist Peter Garnry will be chatting on YCC from a 101 overview, being used by the BoJ in Japan, being used by the Fed during WWII (also focused on 10s) & what the likely implications are from a cross asset perspective. Note its very much expected that this version of YCC will be on the front end of the curve rather than back-end (i.e. more RBA on 3yrs than BoJ on 10yrs).
- For the rest, potentially worth reviewing a few of Powell’s last highlights in May – have to admit, KVP personally missed a number of these... not surprising given all the moving parts... from a spirit & principles perspective love the May 21st one that is kinda open mic to the american tax payers.
- 17 May 2020 Full Transcript: Fed Chair Jerome Powell's 60 Minutes interview on economic recovery from the coronavirus pandemic
- 13 May 2020 An Economic Update by Fed Chair Jerome H. Powell
On The Radar Today
- JP: ACE -0.6%a -1.0%e 0.1%p, M2 Money Stock 5.1%a 4.0%e 3.7%p
- NZ: ANZ Business Confidence
- AU: NAB Business Confidence
- EZ: Jobs Data, Revised GDP, ECOFIN Meetings, GER Trade Balance
- US: NFIB Small Business Index, Final Wholesale Inventories, JOLTS Job Openings, 10yr Auction
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