US equity futures closed well off the Hong Kong Law-induced Asia session lows.
I’ve been continuously highlighting how stock futures trading in recent weeks has morphed into intraday momentum plays, and again this appeared to be the case on Friday. Despite heightened US-China trade tensions and an underwhelming fiscal response from the National People's Congress, global risk appetite came back as global investors start to brush off the Hong Kong law dust and the momentum plays kicked in.
There’s about $80-90 billion in global GDP expected to go up in flames (in the best-case Covid-19 scenario), so with China not setting GDP targets it's probably not that big of a deal in the context that commodities and oil prices are coming from a shallow point anyway. Even more so as global investors are continuing to map the re-opening of global economies to the overall risk narrative, and global stock markets continue to move higher with positive changes in mobility data.
The high-frequency data inputs around increased foot traffic, traffic congestion and public transportation use have temporarily replaced PMIs and other such forward-looking metrics in the market code, so mobility does matter.
As with most Google Analytics features, analysis can be completed in external spreadsheets and databases. The secret sauce lies in automating queries run. What was considered a tinfoil hat analysis not so long ago has now turned into a godsend for the market which continues to trade the second derivative of this analysis by measuring how the rate of change of a Q (queries run) is itself changing.
Buy the dip
Check your mobility data apps first.
There have been plenty of dissenting voices regarding the level of equity markets in the last few weeks. Ahead of a long weekend, you wouldn’t expect dip buyers to emerge, but if anything the last few weeks have taught us not to underestimate the amount of interest in buying the dip.
Provided risk continues to stabilize, two of the three buy signals currently in the stack for Long-Term strategies could come into play this week. These are believed to have the most AUM following, so expect intense buying pressure when the signal crosses. They typically happen around 200 DMA (2997), so I think it’s safe to say S&P500 2995-3000 will hold a chunky buy order.
On the global markets, FX volumes were down around 10% last week, partly due to the Ascension Day holiday in Europe on Thursday and partly due to the lack of apparent directional momentum in the USD and risk generally. Individual themes were very much still in play, including EUR topside since the Franco-German debt agreement, USDCNH and USDHKD spot and forward jitters, GBP movement around Brexit negotiations and re-engagement in selective re-opening short USD plays.
Central banks are heralding a deflationary world in the chorus. And with the heat in and around China continuing to build up, it’s incredibly challenging to jump back on the reflationary trade. But the market will keep pressing that envelope
Here’s my reflationary breakout checklist
As long as these three products are south of the 200-day, you can argue this is a bounce off oversold. Still, I think as we close in and start to peek above those 200-day moving averages, the wall of money argument wins and there’ll be another massive round of bear capitulation.
The question is: how much pain do you want to endure on these trades with US-China trade tension bound to wreak havoc over the near term?
We know the market will soon desensitize to the trade bluster and, who knows, the markets might throw HK to the wolves and move their money stateside or elsewhere in Asia, leaving China to clean up the mess they might have created. I’m a bit saddened by the HK story, so won’t comment on it until next week until I have a better read on China's playbook.
Safe havens (Gold, Silver, BTC, JPY, UST of Cash)
JPY and US bonds have been the safe havens. Gold, silver and bitcoin are behaving like risky assets, not safe havens. Silver and bitcoin have been particularly bad while gold is trading like a currency – and not a haven one. If you don’t think gold is going to get tested by the massive drops in job data and the deflationary implication, you could be in for a substantial unwelcome surprise.
But bonds and JPY are poor havens as they pay little to no interest. Hence, while backward-looking SPX/UST SPX/JPY correlation varies over regimes, so presumably do relationships with other "safe havens". If you want a real haven, it’s cash: liquid, cheap to hold and not volatile. In a Covid-19 environment, there’s always room for a considerable amount of "cash" in the portfolio mix.
I don’t read most gold analysts as I've been trading gold for 25+ years, although I’d never miss an article by Joni Teves (UBS), Jeff Currie (Goldman Sachs) or Alan Ruskin from Deutsche Bank when he makes a foray into the world of gold.
In contrast, most of the others I'm told are sticking to the prevailing narrative, which is the run of central bank largess and risk-off is supposedly good for gold in a Covid-19 environment, but this completely misses the point that the Drukenmillers and Tudor Jones' of the world are preaching.
More stimulus and shifts into NIRP do not translate into more inflation, nor does it increase the velocity of money. Even in better times, Japan failed miserably in this experiment.
Sophisticated investors are flocking to gold believing central banks are primarily de facto government financing vehicles and inflation targeting is just a facade; investors seek debasement/inflation hedges. Gold, silver and BTC are likely the answer. But these things generally go up when stocks go up, so they don’t offer safe harbor from risky asset weakness. In that regard, improving risk sentiment around tertiary commodities and higher oil prices could be suitable for gold prices.
Gold occasionally works as a safe haven; silver and BTC do not work reliably at all. This does not make them bad investments, it just means they’re not "safe havens."
So, keep an eye on the reflationary breakout checklist above –if those levels get breached, gold will fly.
There are mounting tensions on multiple fronts, trade tensions notwithstanding. In mainland China, news from the first day of the NPC suggested regulators were far less dovish than market positioning mostly because the group decided not to set a GDP growth target for this year, and other goals for government support was more foggy than usual. All of this suggests there’ll be a lingering bid in USDCNH, likely for weeks to come. But if China and even HK stocks turn a darker shade of red – and with USDCNH breaking through my short-term trading target of 7.15 I still think currency stability is in the PBoC best interest – risks remain skewed to the topside as markets price a higher risk premium on trade war risk, potentially leading to further portfolio outflows.
Euro and Canadian Dollar will be the truth-bearers for the USD
The market is still looking to sell dollar selectively, believing the US economy will take longer to normalize relative to others given the US labor market will likely remain under pressure well into 2021. Even the higher frequency data still shows claims leveling off rather than trending down as parts of the economy re-opened.
Before "Freaky Friday," the two most unambiguous signals – EURUSD higher, USDCAD lower – needs to be confirmed by the market downplaying of risk aversion as US-China tensions simmer. The less obvious but soaking-under-the-surface narrative is the broad USD weaker story via the performance of carry trades, rising EM FX reserve balances and USD selling in the North American time zone. History reminds me when US time zone G-10 traders start to sell the buck on the back of real money flows, it’s time to take notice.
On Tuesday, when traders return from the long weekend – and if risk continues to normalize after the market has a good soak in the NPC's outpour – the EURUSD and USDCAD (the CAD as it so often does) could be the truth-bearers for the US dollar direction into the summer.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support