Alternative Markets Update, Macro And Political Outlook June 2020

Alternative Markets Update June 2020
Last week, on the highs, saw first significant equity fund inflows since first week of April, as the “cash on the sidelines” gets dragged in. with USD 4 trillion in US money market funds along and underweight equity investors aplenty, there is plenty of reluctant buyers to be dragged in.
Interestingly, the rate of change of the Fed balance sheet has collapsed over the past weeks; with the sheet only increasing by USD 4bn last week. It has been a core view of ours, that President Trump will regard the equity market as his primary scorecard for his presidency. The concept of reclosing the country, or acknowledging the virus and its implications, is being left behind by the US Administration. They will do everything they can to get stocks higher, knowing that IF Trump is voted out in November, the legacy of a record stock market he will be able to show that he left “the greatest economy ever”. So we know that US policy makers have huge firepower at their disposal to drive equity prices higher. ​

The charts below – the first shows the Fed’s balance sheet in blue plotted against the SP500  in red. The top slide shows the absolute size of the sheet, note the correlation with the SP500. The lower slide shows the week on week percentage change in the balance sheet. As can be clearly seen, the rate of change of sheet expansion has collapsed. We should never forget, that getting the US equity market, which will in turn drive all equity prices higher, is now the primary policy of the US Administration.

Figure 1: Comparison of the Fed Balance Sheet with the S&P 500, Source: Fred, June 2020

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RESEARCH PERSPECTIVE VOL. 133 June 2020 Alternative Markets Update June 2020 Equity markets achieved a strong performance throughout May 2020 and continued in early June 2020, boosted by the release of new numbers regarding the US employment, caused by prior substantially wrong economic forecasts. Nevertheless, soon afterwards on 11th June, the stock market took a significant hit, which caused losses around 6% for both, Dow Jones and S&P 500. Bitcoin (BTC) and other cryptocurrencies took a hit of around -5% as well on the 11thJune, despite many estimations of BTC exceeding the $20,000 mark at the end of 2020 and the increased interested of institutional investors during this crisis, discovered by a representative survey conducted by Fidelity. BTC rose about $10,000 once within the last two weeks. Afterwards, it mostly remained at $9,500 with a slow and steady trend towards the $10k mark again. As of 12th June 2020, BTC is at $9,400. In contrast, gold declined slightly over the last two weeks and was able to offset this short downward trend through the events on 11th June, after which it gained and is at $1,738$/oz, slightly above where it had started at the beginning of June 2020. The private markets seem largely unaffected by the current crisis as of now. Private equity funds are investing more cautiously, despite sitting on large cash piles and further potential inflows, e.g. US retirement savers, as the number of alternatives is declining with interest rates at near or below zero, and the current uncertainty in public equities. In the private debt market, CLOs are under pressure to deliver performance and potential downgrades pose treats of future trading restrictions. The influence on real estate is largely geography dependent. In the US, mortgage demand rose by 18%, as interest rates are at record lows. In the UK, house prices have fallen the most since the financial crisis in 2009, despite frequent declines since the Brexit vote. On a global scale, real estate fund AUM has set a record of €3.2tn. Oil surged during the last six weeks, as it doubled from $20 to $40 (WTI crude), prior to the decline on 11th June, after which it fell to $36 per barrel. June Outlook 2020 by Aquila Markets Here at Aquila since our view change on 7th April when we shifted to risk bulls, we have recognised that whilst the headwinds of the economic devastation created by the virus and a mixed global responses, overarching and relentless action by policy makers will create an environment conducive to a risk asset rally that will in conflict with the real economy. In turn we will see some nations, and states within nations, outperform others, but broadly underlying volatility has been and will increase.  Nevertheless, after the initial recovery in risk assets through end of April, early May saw a period of pause before the reopening of many nations, slowly and gradually, created a sense of optimism about the recovery, which kick started the next wave of risk strength. Having said that, here at Aquila we have been on alert for a potential pause in risk markets. Technicals were over stretched, and correlations were becoming strong across all assets. Rotation to the most beaten up stocks showed a desire to look for bargains, and the narrative of the retail investor, taking advantage of zero commissions and fractional share trading, has driven under owned stocks higher and higher. The pause we were waiting for come, but seemingly the selloff happened all at once, fitting with our overarching sense of “higher volatility”. A multitude of reasons can be presented, but crucially it was most likely the Fed meeting and Powell press conference that tipped a stretched market over the edge where a lack of inflation expectations, and downbeat expectations knocked a nascent rise in bond yields on the head, turned copper and stocks lower in line with oil which had topped around a week, and rolled over into brutal liquidation of weak hands and leveraged positions. So have liked this short term pullback to clean up the market “technicals” and remove a little froth, but we view selloff as a buying opportunity. Just because they had a selloff and maybe took a loss, the retail traders are not going to just turn off Robinhood and go and do something else. Last week, on the highs, saw first significant equity fund inflows since first week of April, as the “cash on the sidelines” gets dragged in. with USD 4 trillion in US money market funds along and underweight equity investors aplenty, there is plenty of reluctant buyers to be dragged in. Interestingly, the rate of change of the Fed balance sheet has collapsed over the past weeks; with the sheet only increasing by USD 4bn last week. It has been a core view of ours, that President Trump will regard the equity market as his primary scorecard for his presidency. The concept of reclosing the country, or acknowledging the virus and its implications, is being left behind by the US Administration. They will do everything they can to get stocks higher, knowing that IF Trump is voted out in November, the legacy of a record stock market he will be able to show that he left “the greatest economy ever”. So we know that US policy makers have huge firepower at their disposal to drive equity prices higher. So two charts below – the first shows the Fed’s balance sheet in blue plotted against the SP500 in red. The top slide shows the absolute size of the sheet, note the correlation with the SP500. The lower slide shows the week on week percentage change in the balance sheet. As can be clearly seen, the rate of change of sheet expansion has collapsed. We should never forget, that getting the US equity market, which will in turn drive all equity prices higher, is now the primary policy of the US Administration. Figure 1: Comparison of the Fed Balance Sheet with the S&P 500, Source: Fred, June 2020 And so the second chart is that of the SP500, weekly chart since the Trump election. It shows the pick up in volatility really since the volmaggedon selloff of January 2018, and the selloff in march was so severe is almost wrote off the entirety of the Trump stock market gains. We are watching a close on a weekly basis today at 3006, which is the 50 week ma. Our target remains – new highs, AND BEFORE the US election on November 3rd election day. We are in for a LOT more volatility! Figure 2: S&P 500 Level Since Trump’s Election in 2016, Source: Aquila Markets, June 2020 The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Chris Eagle Aquila Markets E : [email protected] M : +447712885718 Chris is an experienced executive who runs his own consultancy service which focuses on business development, market structure, financial market analysis and training. He worked on the sell-side for twenty years. He left Jefferies in 2015, where he worked in the Global Foreign Exchange and was Head of FX product distribution. This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries or for further information around our research and advisory services please contact email: [email protected] under Tel.: +442037228175. Macro and Political Outlook June 2020 by Macro Eagle 1 – MAY REVIEW. “Re-opening” optimism, vaccine hopes (Moderna) and a “wall of money” (stimulus) drove equity markets higher in May. As expected, geopolitical brinkmanship is on the up and the “blame game” has started. The international version is China-centric, with a broad Western political consensus emerging prepared to take economic pain to reduce dependency. The domestic version is driven by those who have been hardest hit economically by the pandemic: the low-paid and the young. When lockdown-frustration and dismal job prospects meet pre-existing (real or perceived) grudges, you get fireworks! The “late 1960s” are a good historical template if you need one. The big surprises last month were both German: First, the Constitutional Court ruling (May 5th) declaring the ECJ “ultra vires”, which in turn forced the “Hamiltonian moment” of May 18th (common debt). Obviously with the caveat that this is all just “exceptional and temporary”. They always say that, don’t they? Figure 3: Macroeconomic and Political Events in May and Their Influence on the Performance of the S&P 500, Source: Macro Eagle, June 2020 2 – JUNE PREVIEW. June always sees protests in Hong Kong, starting with the Tiananmen anniversary (June 4th) and ending with SAR-Day (July 1st). Given that Beijing is somewhat tense, keep an eye on that one. Otherwise, tons of central bank action: ECB (cautious post-GCC ruling?), FED (Yield Curve Control?), BOE (negative rates under “active review”) and BOJ. Tourism in Europe will largely re-open on June 15th and football restarts in England on June 17th. Von der Leyen’s budget (May 27th) gets discussed at the EU Council meeting (June 18-19th), probably with the usual theatrics. Finally, Britain won’t ask for an extension of trade-talks by June 30th, mainly because the worst-case (-8% GDP “cost” over 10 years for reverting to WTO terms) is a rounding error amidst the Covid-devastation. Figure 4: Events in June, Source: Macro Eagle, June 2020  3 – IS THE EQUITY RALLY SUSTAINABLE? Short-term yes, medium-term not. Bullish arguments: (1) stimulus bazooka and wall of money (2) low expectations for Q2; (3) high recovery hopes for Q3; (4) vaccine-R&D and tracing technology; (5) negative Fed Fund Futures implying “low for longer”; (6) unstoppable rise of BigTech; (7) WFH combined with glorious weather. By contrast, most bearish arguments are medium-term, except for (1) high “valuations”, a point made repeatedly in May by Buffett/Druckenmiller/Tepper and others. Once the fiscal stimulus stops in the autumn, there is more to pick from: (2) temporary layoffs becoming permanent; (3) bankruptcies and downgrades; (4) bank loan losses; (4) debt repayments and higher taxation – especially for Big Tech; (5) potential second virus wave; (6) inflationary surprises; (7) political changes and geo-political tensions. I would suggest to keep an eye on US Consumer Confidence. It is holding up fairly well, despite hard data (Industrial Production and Retail Sales) collapsing. That’s probably because most unemployed consider their status as “temporary”. Should that believe change – RUN for cover. Figure 5: Key Statistics of the US, Source: Macro Eagle, June 2020 4 - THE NEXT PHASE OF COVID. At first Covid had a “national-unity” effect, as few disputed the need for “total lockdown”. The current “opening up” phase will be less friendly, as few agree on the “how” and “when”. Luckily, the beauty of global non-coordination lies in the diversity of approaches, which will help us to prepare better for the next round. There are the obvious absolute differences between Vietnam (zero deaths) and Brazil (30,000 deaths). But as the graph below shows, “policy effectiveness” does not necessarily translate into “political approval”. Japan and Vietnam have pretty much the same DPC (“deaths per capita”) but a huge difference in GAR (“government approval rating”). On the other hand, Germany and Italy have the same GAR, despite a huge difference in DPC. This matters politically – so keep an eye on it. I also wouldn’t be surprised if in the long-term, the “total-lockdown” policy turns out to have caused more deaths (due to missed cancer diagnosis, domestic violence, alcoholism, suicide, untreated heart attacks, strokes, lack of vaccinations, etc.) than lives it has saved. Figure 6: Country Comparison of Deaths per Capita, Source: John Hopkins University, June 2020 5 - WHAT IS CHINA UP TO? China has been moving hard and fast on the foreign policy front ever since the “blame game” started, with May being no exception: (1) Hong Kong’s new national security law; (2) “wolf-warrior” diplomacy with critics in Australia/EU/USA; (3) military war games around Taiwan and PM Li Keqiang omitting the word “peaceful” from his ritual reference to reunification at the NPC on May 22nd; (4) escalating border conflict with India in the Galwan Valley region; (5) collisions with Vietnamese, Taiwanese and Japanese boats in the South and East China sea. Why? Well – in a One-Party system the political legitimacy normally comes from wealth creation for the people. But if the economy slows, then the usual trick is to flip to “safety & honour” (I know – I grew up in South America). So, I wouldn’t take the above signs lightly and I definitely wouldn’t go on a sailing trip around the South China Sea this summer.    Figure 7: China’s Geo-Strategic Perspective, Source: Macro Eagle, June 2020 6 - WHAT ABOUT THE US ELECTION? In theory Trump should have this election in the bag: (1) incumbency advantage; (2) massive fiscal stimulus with many lower-paid workers better off unemployed than employed; (3) beating Biden in fund raising; (4) and social media following; (5) helped by Biden gaffes like “you ain’t black if you support Donald Trump”. But … despite all this, the betting markets and polls continue to point towards a Biden victory – and I agree. The Democratic leadership (I credit Pelosi) is being much smarter than in 2016. First, Sanders was beaten early by pulling Buttigieg/Klobuchar out of the race before Super-Tuesday. Second, the Sandinistas are kept on board by keeping Elizabeth Warren in the VP race. Third, the VP-nomination process is also being used to raise the profile of Democrats in key Swing States: Georgia (Abrams, Lance-Bottoms), Florida (Demings), Midwest (Klobuchar, Duckworth, Whitmer). Finally, no Democrat I speak to is taking victory for granted (big difference to 2016). I do expect markets to become increasingly nervous as the election approaches and the reversion of Tax Cuts, revocation of Section 230 and increased regulation becoming a reality. Figure 8: Electoral Vote Forecast of the US Presidential Race 2020, Source: Macro Eagle, June 2020 7 – WHAT IS NEXT FOR EUROPE? Considering that only a few months ago, Macron’s demands for “coronabonds” were dismissed as a “phantom debate” by Altmaier and Merkel, what happened on May 18th certainly was an enormous shift in principle. I credit Covid (the German fiscal stimulus would have torn Europe apart) and the German Constitutional Court (for indirectly reminding Berlin that fiscal policy is the Bundestag’s job). Still, even when adding the unemployment insurance scheme (SURE) and the suspension of “state aid prohibition” this is all just another EU-style “muddling through” moment, not a Hamiltonian “break-through”.  Why? (1) The size of the cake has been set, but not yet who gets what. The “frugal four” will demand “rebates” for their consent and the Eastern-bloc, will fight for their EU “cohesion funds”. (2) Legal challenges will continue to be brought to the Germany Constitutional Court until the EU Treaties get reformed/updated – which is not likely in the foreseeable future. (3) Common debt ultimately requires common revenue, which is when the whole discussion about structural and fiscal reforms will come back. But in the short-term, definitely positive. Figure 9: EU Budget Contributions Sorted by Countries, Source: Macro Eagle, June 2020 8 – BIG TECH AND THE CURSE OF BEING (TOO) SUCCESSFUL. While industries in the physical world bear the brunt of the lockdown, those in the digital realm thrive. The problem is that they might thrive too much: (1) Cash rich they are on an asset gathering mission, the latest example being Amazon/Zoox. (2) The development of a tracing app in Europe by Google/Apple is a reminder to governments that “there is no alternative”. (3) US politicians are falling out with the censoring powers of the Social Media giants, and not just Trump, see also Ted Cruz’s reaction to YouTube’s censoring. In fact, “Tech-lashing” has become a bipartisan sport, with Warren keen on Big Tech break-up, and Biden questioning Section 230. Soon we will also get the outcome of the Department of Justice investigation into Google’s monopoly power. Bottom line: I’m bullish everything Digital – just cautious on the big guys. Figure 10: Development of Several S&P Indices During the Covid-19 Crisis, Source: Macro Eagle, June 2020 9 – MARKETS & ASSET ALLOCATION. Since I’m convinced that many of the current trends are short-term in nature, the overarching theme is to stay tactically “nimble and liquid”, while being long-term diversified (across about 15 core positions). On the former I like EM differentiation plays (mainly Asia vs. Latam), US curve steepeners, buying with the Central Banks (US credit ETFs) and guessing where the fiscal policy bazooka will flow to (infrastructure, green-economy). I also think we will have a serious oil shortage in the autumn/summer – so long selected oil players. For the long-term, I continue to be long Gold, long inflation, long GBP, long rural real estate and (like everybody else) on the lookout for distressed opportunities. Ah, and I’m finally considering to add Bitcoin (what is good enough for Stan, is good enough for me).   Have a great JUNE … and MAY THE MARKET BE WITH YOU. Bobby   The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Bobby Vedral MacroEagle E : i[email protected] M : +447899996595 Bobby is a macro-political analyst who runs his own fund MacroEagle. He is also the UK representative of the German Economic Council (Wirtschaftsrat Deutschland) focused on the German-British relationship post-Brexit. Bobby left Goldman Sachs in March 2018, where he was a Partner and Global Head of Market Strats. His previous responsibilities included Systematic Trading Strategies, eProduct and FX/EM Structuring. In his external functions he was Member of the ECB's FX Consulting Group. Before Goldman Sachs, Bobby worked at Deutsche Bank and UniCredit/HVB. 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