Chief Investment Officer
Summary: US equities retraced a good deal of their gains yesterday, with the big tech names still rather resilient relative to particularly weak financials and the median stock, especially in small caps, which were in full retreat. Today we watch for whether risk sentiment has peaked and continue to track the EU existential strains and the Main Street versus Wall Street narrative.
We continue to see a “Main Street vs. Wall Street” narrative, as today’s latest US jobless claims in the millions will contrast with the Amazon all-time highs and traders making free arbitrage money, for example from the mismatch in corporate bond prices versus the underlying bonds on the Fed’s moves support the corporate bond market directly and via ETFs.
We are also closely watching the EU existential risks as well as US President Trump’s plans for opening up the US economy and the response from both local authorities and at the popular level.
What is our trading focus?
What is going on?
Covid19 – While EU case counts and especially death counts are clearly rounding the corner and EU nations will begin opening up their economy, most starting in early May, the death toll has continued to rise in the US, with yesterday’s the worst for the cycle with nearly 2,500. The world’s largest pork producer, US Smithfield foods, is closing 2 more processing plants and warned of bottlenecks in the US food supply chain.
US Secretary of State Pompeo demands China come with more Covid19 origin information – and referenced the Wuhan virology lab near the origin of the outbreak. A fresh worsening in US-China relations would add to the risks for the global outlook.
Australia March Jobs Report – This data not particularly useful as the sampling takes place early in the month, as the Australia Bureau of Statistics reported a 0.1% rise in the unemployment rate to 5.2% and a small nominal rise in payrolls in March for a country that was in a total lockdown by month-end. The market clearly ignored the numbers and the AUDUSD sold off back toward the session lows. The Australian Treasury projects 10% unemployment for Q2.
What we are watching next?
The mood in Europe – The Italy-Germany yield spread rose further yesterday to close at 235 basis points – we will continue to watch this spread, the EURUSD exchange rate and any political signaling out of Europe on the prospects for “coronabonds” or other moves toward mutualization or the opposite as we head toward the next absolutely critical date for the EU – the April 23 video summit of the European council (the heads of state across the EU).
XAUUSD drifting lower. A stronger dollar weighing together with emerging disappointment from recently established longs that the response to the latest Fed action has not been stronger. Long term investors meanwhile using exchange-traded funds have continued to accumulate gold with total holdings at a record 2922 tons. Risk of another mini correction on a break below $1700/oz, the recent high and uptrend support from the March 16 low.
US President Trump to announce plans for reopening the US economy today and interesting to watch how this is received locally, as states have argued they have the constitutional right to supersede the Federal authority in dealing with the outbreak. In Michigan, thousands of protestors drove around the Michigan Capitol in protest of the lockdown orders.
US jobless claims – while the market is trading on the heavy hand of the Fed in supporting asset prices, it is critical to note the damage being done to main street during this outbreak – we watch today’s US weekly claims as the totals so far suggest that the US unemployment rate is already at its worst levels since the Great Depression.
Economic Calendar (times GMT)
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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