5 Jun 2020

WHAT HAPPENED YESTERDAY

As of New York Close 4 Jun 2020,

FX

U.S. Dollar Index, -0.54%, 96.75
USDJPY, +0.22%, $109.14
EURUSD, +0.91%, $1.1336
GBPUSD, +0.25%, $1.2607
USDCAD, +0.04%, $1.3500
AUDUSD, +0.27%, $0.6939
NZDUSD, +0.64%, $0.6463

STOCK INDICES

S&P500, -0.34%, 3,112.35
Dow Jones, +0.05%, 26,281.82
Nasdaq, -0.69%, 9,615.81
Nikkei 225, +0.36%, 22,695.74

COMMODITIES

Gold Spot, +0.83%, 1,712.72
Brent Oil Spot, +1.24%, 39.12

SUMMARY:

U.S. Initial claims for the week ending May 30 decreased by 249,000 to 1.877 million (consensus 1.800 million). Continuing claims for the week ending May 23 increased by 649,000 to 21.487 million. The key takeaway from the report is twofold: (1) initial claims are still extremely high and (2) continuing claims didn’t continue to improve, denoting some lag in rehiring activity. A revision reported by the BLS indicated nonfarm business sector labor productivity decreased by 0.9% (consensus -2.6%) in the first quarter versus an originally reported decrease of 2.5%. Unit labor costs, meanwhile, increased by 5.1% versus an originally reported 4.8% increase. The key takeaway from the report is that productivity was better than expected in the first quarter, but it was still weak all the same.

The ECB increased its Pandemic Emergency Purchase Program by EUR600 billion to a total of EUR1.350 trillion. The ECB extended this program until at least the end of June 2021 The aggressive stimulus from the ECB fueled optimism about a recovery in Europe, which could be on the verge of a stronger fiscal union. As we pointed out yesterday that if the increase was more than 500 billion EUR, it would be positive for the EUR, and so it was. With regards to inflation, the ECB staff projections predict headline inflation to come in at 0.3% in 2020, 0.8% in 2021, and 1.3% in 2022. The Euro continued to rise against the dollar, contributing to another 0.5% decline in the U.S. Dollar Index (96.82). USD remained on its backfoot, but other than the EUR rally, the other currencies were pretty contained.

S&P 500 declined 0.3% on Thursday in a mixed session to snap a four-session winning streak. The Dow Jones Industrial Average eked out a 0.1% gain, the Nasdaq Composite declined 0.7%, and the Russell 2000 closed flat.

There were pockets of relative strength, though, specifically in the S&P 500 financials (+2.0%) and industrials (+1.1%) sectors, the Philadelphia Semiconductor Index (+0.8%), and in many of the travel-related industries. The battered travel stocks exhibited huge gains today. The latter was boosted by American Airlines (AAL 16.74, +4.89, +41.3%) announcing plans to increase its domestic flying schedule for the summer travel season due to improving demand. AAL shares surged 41% while Boeing (BA 184.30, +11.14, +6.4%) shares rose 6%.

ECB BOOSTS PANDEMIC STIMULUS TO 1.35 TRILLION EUROS

The European Central Bank announced a further 600 billion euros ($676 billion) to its virus rescue plan Thursday, bringing the total stimulus package to an astonishing 1.35 trillion euros ($1.52 trillion). Markets were largely pricing in a 500 billion euros increase ($563 billion) to the ECB’s so-called Pandemic Emergency Purchase programme.

Thursday’s decision leaves the ECB’s benchmark Deposit Facility Rate at -0.5%, meaning banks are charged that annual rate for parking idle cash at the central bank. The rate on the ECB’s Main Refinancing Operations, which banks can tap to obtain one-week credit from the central bank, was left at zero while the rate on overnight liquidity was fixed at 0.25%.

The bank revised downward its baseline scenario for euro zone output this year to a contraction of 8.7% from the modest 0.8% rise it had forecast only in March. It predicted a partial rebound with growth of 5.2% next year and 3.3% in 2022 but Lagarde told a news conference that signs of any recovery so far were “tepid” and that risks to its baseline projection were on the downside.

IMPACT: The announcement, which comes just weeks after Germany’s Constitutional Court ruled that the ECB had already been exceeding its mandate with a longstanding asset purchase programme, prompted a rally in the EUR. In the grand scheme of things, the stimulus was undoubtedly sizable, but the key reason why this was so important is that it changes the narrative of Europe being a basket-case and dud union. Their resolve to agree on something historically unprecedented (counterintuitive to Maastricht Treaty’s fiscal rules) shows there might be some light at the end of the tunnel. Could this Franco-German led push cause a renaissance in Europe? The EU sure deserves a second assessment after this monumental feat.

TRUMP GIVES U.S. AGENCIES POWER TO FAST-TRACK BIG INFRASTRUCTURE PROJECTS

Trump on Thursday signed an executive order that gives federal agencies emergency powers to fast-track major energy and other infrastructure projects by overriding environmental permitting requirements. The White House said the order was a way to help the economy rebound from the impact of the virus pandemic and improve infrastructure.

It calls for public works and highway projects as well as energy projects like pipelines and terminals to be expedited. It instructs the Interior, Agriculture, and Defense Departments to accelerate projects on federal lands.

IMPACT: With fiscal measures, construction will be the name of the game as it fulfills several key roles, 1. Provide Tons of Jobs 2. Increase Infrastructure for Productivity 3. De-Globalization requires reshoring and rebuilding of domestic supply chains. These are inflationary in nature and will bode well for hard commodities and commodity-related currencies in the long run (AUD).”, Trump announced this a day after we alerted readers that countries will “build their way out of this crisis”. It sure is a developing trend with Copper and Silver (55% industrial use) seemingly in the early innings of a multi-year trend.

ARGENTINA EXTENDS LOCKDOWN AS CASES SURGE,

BRAZIL LOOKS TO REOPEN AS CASES SURGE

Argentina extended on Thursday a mandatory lockdown in Buenos Aires, the capital, and some other parts of the country until June 28, as confirmed Covid-19 cases continue to rise, surpassing 20,000 earlier in the day. Argentina recorded 929 new infections on Thursday, one of the highest daily counts since the pandemic began. The country has 20,197 cases, mostly in the city of Buenos Aires and the province of Buenos Aires. The death toll is at 608.

The mayor of Rio de Janeiro allowed more than 10,000 street vendors to go back to work on Thursday and Brazil’s president pressed for legal action to force local governments to reopen beaches, as the Covid-19 death toll in the country quickly approached that of Italy. Since the beginning of the pandemic, right-wing President Jair Bolsonaro has downplayed the virus, saying on Tuesday that death is “everyone’s destiny,” and that hunger and unemployment will ultimately prove more deadly.

IMPACT: You are only as strong as your weakest link, that is the case for the Southern Hemisphere and inevitably the world as viral containment is not a closed-loop solution where borders count. The threat of a global second wave is kept alive and well due to countries like Brazil. The world is rallying on hope that is built on precarious foundations.

DAY AHEAD

Non-Farm Payrolls

The cocktail of violent protests across US major cities and a rising risk appetite upset the Dollar and let other major currencies collect sizable gains for more than a week now. On Friday the Non-farm Payrolls report may not be an ideal one, but it could add some floor under the battered greenback if the data indicate that the worst of job losses is likely behind.

Everyone is aware that a quick bounce back to record low unemployment rate levels could be a tough task as governments may not fully remove restrictions before an effective vaccine comes to light, forcing companies to operate at limited capacity for longer. However, at the current re-opening phase governments and central banks are thirsty for some encouraging news that point to a V-shaped economic recovery and the NFP release this week, although still painful, could add weight to that view if the job numbers show that re-hiring has begun to outpace new layoffs in May.

SENTIMENT

OVERALL SENTIMENT: More easing measures from the ECB, as they are determined to reinforce the message that they will do whatever it takes to support the economy and the market. Rising long end yields in the US with the 10-year government bond yield trading at 0.80%, up 0.30% from the low of 0.50% in April and the absolute low of 0.36% at the height of the panic in March. China and Europe are all seeing a rise in the long end yields, as markets seem to be starting to focus on the possibility of inflation in the longer term with all the incessant money printing. This is something that should be monitored as inflation, should it rear its head, will prevent more aggressive easing in the months ahead.

FX

Stock Indices

TRADING TIP

Different Rules for Different People

Much like in life, rules are applied differently for different currencies in macro. If the Federal Reserve were to expand their Quantitative Easing programmes, USD would tend to weaken. That is usually the case for most central banks and their respective currencies, but it seems to work differently for the ECB.

When the ECB announced a bigger than expected increase in the amount of bonds they would be buying (600 billion EUR vs market expectations of 250–500 billion EUR), the EUR rallied nearly a percent against the USD. Why is that?

Currently the risk that the market fear is inaction and indecisiveness from the EMU and the ECB will lead to more stress for members of the union such as Italy and Spain which have been badly affected by the Covid-19 crisis. Any decisive action that shows the resolve of the authorities to help will lessen the fear of a break-up of the union.

There are always rules of thumb in trading but there are always exceptions to the rules. If this was easy, we wouldn’t be paid handsomely to get it right! Happy Friday and have a good weekend!

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