alternative markets update may and political outlook may 2020

Alternative Markets Update May 2020
The overall situation of Covid-19 is finally getting better. Most countries in Europe have started to loosen their restrictions, while many countries have already loosened their restriction multiple times. So far, the loosening of restriction has been a success, as there were mostly no increases in daily infections. In the US, the situation got better as well, but not to the level as it is in Europe. Despite the still relatively high number of infections in the US, they are loosening their restrictions too. The market fear of a second wave is very present, especially in the US. There are finally some good news in the oil market, as oil prices have stabilized and rose continuously to above $25 per barrel for crude oil. In the hedge fund industry, CTAs remain the most profitable strategy, despite the weakness of the energy sector in the current market environment. In general, April 2020 was a very good month for hedge funds, as the industry posted its best monthly performance in six years, which is largely driven by the substantial bounce back of equities, after their huge decline in March 2020. In the crypto space, the highly anticipated Bitcoin (BTC) halving took place on Monday, the 11thMay 2020. BTC started rallying upwards since the end of April, which was caused by the widely discussed upcoming halving and information that more institutional investors are looking at BTC, as a potential hedge against inflation. As a consequence, BTC rose sharply from $7,700 on 28th April to $9,300 on 30th April. During the next week it remained relatively stable, with an additional surge on 9th May, after which BTC rose above $10,000. However, just a few days prior to the halving, BTC dropped again and remains now $9,000 (as of 13th May). The impact on private equity and private debt due to the coronavirus is still uncertain, as data in these industries are available with a significant time delay. In real estate, house prices fall, especially luxury real estate.

Macro and Political Outlook May 2020 by Macro Eagle
1 – APRIL REVIEW Another month for the history books. Despite “total lock-down” and widespread economic implosion, the S&P500 (+12%) had its best month since January 1987, mainly thanks to unprecedented fiscal and monetary stimulus. This dichotomy between the real economy and financial markets reminds me of an injured soldier (economy), who while high on morphine (stimulus) keeps cracking jokes (market). The problem: morphine only gives you time … it does not solve the problem and it can have nasty side-effects. More on that below. First, the review:
Week 1: With Trump warning of up to 240,000 US casualties on April 1st, we had the worst S&P quarterly start EVER (-4.4%). The next day, oil had its largest 1-day gain EVER as Russians and Saudis started talks. The week ended with the biggest oil price gain (+32%) since 1983. Boris Johnson taken to hospital.
Week 2:  Positive Covid data in Europe and NYC trigger a 7% rally on Monday (6th). Bernie Sanders drops out of the presidential race (Wed 8th). Fed adds $2.3trn in stimulus and buys junk bonds for the first time EVER (Thu 9th). The S&P (+12%) records its best week since 1974 and technically enters a “bull market” (up 20% from the lows), ending shortest Bear Market ever. Really? That’s it? Eurogroup agrees emergency package.
Week 3: OPEC+ agrees on biggest production cut EVER (10mbd). Market rallies on positive Covid data and vaccine-hopes (Gilead’s remdesivir) despite grim IMF global growth forecasts, worst ever decline in US Retail Sales (-8.7%) and largest ever drop in US housing starts.
Week 4: WTI (oil) May future contract drops into negative territory (-$37) for the first time EVER on supply-demand technicalities. US Senate passes $500bn stimulus bill. ECB follows Fed and accepts “junk” as collateral. Trump suggests disinfectant as possible Covid cure. 
Week 5: “Re-opening” plans start the week on a positive note. But markets get hit with a new wave of negative data: US Q1 GDP -4.8% (worst since 2008), US Consumer Spending at -7.5% (biggest 1-month drop since records began in 1959) and disappointing Amazon results. It slowly dawns on markets that all might not be that well.

Figure 1: Review of the S&P500 During April, Source: Macro Eagle, May 2020

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RESEARCH PERSPECTIVE VOL. 131 May 2020 Alternative Markets Update May 2020 The overall situation of Covid-19 is finally getting better. Most countries in Europe have started to loosen their restrictions, while many countries have already loosened their restriction multiple times. So far, the loosening of restriction has been a success, as there were mostly no increases in daily infections. In the US, the situation got better as well, but not to the level as it is in Europe. Despite the still relatively high number of infections in the US, they are loosening their restrictions too. The market fear of a second wave is very present, especially in the US. There are finally some good news in the oil market, as oil prices have stabilized and rose continuously to above $25 per barrel for crude oil. In the hedge fund industry, CTAs remain the most profitable strategy, despite the weakness of the energy sector in the current market environment. In general, April 2020 was a very good month for hedge funds, as the industry posted its best monthly performance in six years, which is largely driven by the substantial bounce back of equities, after their huge decline in March 2020. In the crypto space, the highly anticipated Bitcoin (BTC) halving took place on Monday, the 11thMay 2020. BTC started rallying upwards since the end of April, which was caused by the widely discussed upcoming halving and information that more institutional investors are looking at BTC, as a potential hedge against inflation. As a consequence, BTC rose sharply from $7,700 on 28th April to $9,300 on 30th April. During the next week it remained relatively stable, with an additional surge on 9th May, after which BTC rose above $10,000. However, just a few days prior to the halving, BTC dropped again and remains now $9,000 (as of 13th May). The impact on private equity and private debt due to the coronavirus is still uncertain, as data in these industries are available with a significant time delay. In real estate, house prices fall, especially luxury real estate. Macro and Political Outlook May 2020 by Macro Eagle 1 – APRIL REVIEW Another month for the history books. Despite “total lock-down” and widespread economic implosion, the S&P500 (+12%) had its best month since January 1987, mainly thanks to unprecedented fiscal and monetary stimulus. This dichotomy between the real economy and financial markets reminds me of an injured soldier (economy), who while high on morphine (stimulus) keeps cracking jokes (market). The problem: morphine only gives you time … it does not solve the problem and it can have nasty side-effects. More on that below. First, the review: Week 1: With Trump warning of up to 240,000 US casualties on April 1st, we had the worst S&P quarterly start EVER (-4.4%). The next day, oil had its largest 1-day gain EVER as Russians and Saudis started talks. The week ended with the biggest oil price gain (+32%) since 1983. Boris Johnson taken to hospital. Week 2:  Positive Covid data in Europe and NYC trigger a 7% rally on Monday (6th). Bernie Sanders drops out of the presidential race (Wed 8th). Fed adds $2.3trn in stimulus and buys junk bonds for the first time EVER (Thu 9th). The S&P (+12%) records its best week since 1974 and technically enters a “bull market” (up 20% from the lows), ending shortest Bear Market ever. Really? That’s it? Eurogroup agrees emergency package. Week 3: OPEC+ agrees on biggest production cut EVER (10mbd). Market rallies on positive Covid data and vaccine-hopes (Gilead’s remdesivir) despite grim IMF global growth forecasts, worst ever decline in US Retail Sales (-8.7%) and largest ever drop in US housing starts. Week 4: WTI (oil) May future contract drops into negative territory (-$37) for the first time EVER on supply-demand technicalities. US Senate passes $500bn stimulus bill. ECB follows Fed and accepts “junk” as collateral. Trump suggests disinfectant as possible Covid cure.  Week 5: “Re-opening” plans start the week on a positive note. But markets get hit with a new wave of negative data: US Q1 GDP -4.8% (worst since 2008), US Consumer Spending at -7.5% (biggest 1-month drop since records began in 1959) and disappointing Amazon results. It slowly dawns on markets that all might not be that well. Figure 1: Review of the S&P500 During April, Source: Macro Eagle, May 2020 2 – AS A SIDE NOTE … In April Boris Johnson went from being looked after in an ICU, to “rising” on Easter Sunday (really?) to back in Downing Street and becoming father for the n-th time as the month closed. Quite an impressive performance. Interestingly Boris (55) is among the youngest G20 leaders (average age: 62, median: 65) – so not the obvious candidate, given the broader Covid statistics. It is actually quite surprising how few (if any) of our senior political celebrities have been hit by the virus so far. Think about it: Queen Elizabeth (92), Pope Francis (83), Nancy Pelosi (80), Joe Biden (77) and so on. May they stay safe.  Figure 2: Age of G20 Leaders, Source: Macro Eagle, May 2020 3 – THE MONTH AHEAD. The key focus will most likely be on the success of various Covid “re-opening” strategies (Italy May 4th, France May 11th, various US states). Otherwise, in the first week we will get the first draft of the new 7-year EU budget (Tuesday 6th) which might spark some North-South fireworks. On Friday (8th) the US will probably report an April unemployment rate of 16% (compare this to the  50-year low of 3.5% seen in February) and the biggest increase in monthly unemployed (probably 22mio) since the US demobilized in September 1945 after WW2. In the second week, Friday 15th will be of particular interest as we get tons of key US data (Retail Sales, industrial production, consumer sentiment). The third week brings us the start of China’s National People’s Congress and the fourth week brings crucial US consumer confidence data.  Figure 3: Schedule of Important Political Events in May 2020, Source: Macro Eagle, May 2020 4 – VIEW INTO YEAR-END. My views into Year-End are pretty unchanged from last month: in June - G7 leaders to meet in person in Miami and the UK not to ask for any trade-talk extension with the EU. In July, Berlin takes over the rotating EU Council presidency which comes at a very critical moment: EU budget, Covid-response and UK relationship. The “European Summer” will be key to watch for two reasons: (1) Northern countries are keen to keep their citizens at home, but Southern countries desperately need tourists. (2) With an escalating civil war in Libya and Syria, Covid hitting the Global South and locust plague in East Africa, I do think there is a high risk of a significant migration wave towards Europe – which will (again) test EU’s internal cohesion. Then comes the US election – more on that below.  Figure 4: Schedule of Important Political Events in 2020, Source: Macro Eagle, May 2020 5 – COVID. As I said last month, as we get more data (which we have), “the virus will transition from being an unknown uncertainty to a known risk”. Also, as mentioned, it is highly possible that more testing will reveal a high number of asymptomatic cases and hence a case fatality rate (CFR) of well below 1%. That is still much higher than the seasonal flu, but certainly is no Ebola (CFR of 50%), SARS (10%) or Spanish Flu (2%). Hence, as expected, politicians are now starting to move from “total lockdown” to “smart lockdown” as the society needs to “learn to live with Covid”. Also, the inevitable discussions will have to be had of how much Covid-deaths are acceptable, given that (1) healthcare capacity has been increased significantly – so the risk of overwhelming the system has decreased. (2) Non-Covid deaths are on the rise as people avoid going to hospitals for treatment during the lockdown. (3) Any economic slowdown/collapse ultimately costs lives. The bottom line is that locking down the society/economy is almost the easy part for political leaders (it makes them look decisive and caring). The tough part lies ahead, i.e. the talk about trade-offs (especially safety vs. freedom), when politicians will be less able to hide behind epidemiologists.   6 – US ELECTION. Far too early to say, but interestingly the betting market is now putting its money behind Biden over Trump (see graph below). My own model agrees, as I think Michigan and Penn will fall to the Dems (for many reasons beyond Covid). That will make Biden’s choice of running mate highly important, as she (and it will be a “she”) will probably have quite some influence in policy-setting and could very well succeed Biden. The betting market’s favourite is Kamala Harris, but I disagree – as I see no electoral benefit in the Rust-Belt from picking a Californian. Elizabeth Warren will scare too many donors – so she is a “no”. My money is on either Amy Klobuchar (Senator for Minnesota) or Gretchen Whitmer (governor of Michigan). The latter is a key swing state and she was picked to give the Democrat’s response to Trump’s State of the Union speech this year. Klobuchar’s odds are 4:1, while Whitmer’s are 10:1. I just added on Whitmer. Figure 5: Vote Forecast of the US Presidential Race in the US, Source: Macro Eagle, May 2020 7 – EUROPE. The EU is a complex ecosystem. On one side very “static” and hence prone to blow-up speculations. On the other side very “flexible” and hence adaptable under stress. In fact, with every crisis the EU is more likely to adapt than to blow up. Nonetheless, I’m avoiding EU assets this summer, as I think the Union will come under severe stress for three reasons: (1) the Covid crisis has encouraging the South to launch a “moral” all-in assault on the North, which we will see play out in the budget discussion starting this week. The Italian-Dutch clash is a proxy fight between Germany and France. Since the Dutch and Germans are having their general elections next year, they are unlikely to go soft. (2) As mentioned above, Syria/Libya/Covid/locust-pest could lead to a spike in migration towards the EU as the weather and Mediterranean-crossing conditions improve. (3) If the EU-North doesn’t “unlock” tourism to the EU-South this summer, then economic divergence and negative goodwill will increase. As usual, the ECB will have to play short-term fire-fighter, especially since the Council’s unanimity framework leads to paralysis and without the UK the EU-North has lost its QMV-blocking-majority in parliament (see simplified illustration below). EU Treaty reform in the medium-term is unavoidable. Figure 6: Political Situation Within the European Union, Source: Macro Eagle, May 2020 8 – CHINA. Highlight is obviously the National People’s Congress starting on May 21st. Of great interest will be as usual their growth target for 2020 (it was China’s growth stimulus that pulled most of the world out of recession in 2009). But much focus will also be on geopolitical statements, given that China’s diplomatic machine has recently gone into over-drive: (1) airspace violations of Taiwan; (2) the establishment of two districts with jurisdiction over the South China Sea; (3) Chinese embassy spat with France; (4) pressure on Brussels over its External Action Service report accusing China of running a “global disinformation campaign to deflect blame for the outbreak of the pandemic”. With “China bashing” probably a bipartisan feature of the upcoming US election campaign (Missouri already filed a civil lawsuit in a US court, accusing China of deception), the China vs. West tension is likely to escalate this summer.  Figure 7: China’s Annual National People’s Congress, Source: Macro Eagle, May 2020 9 – MARKETS. My main focus is (as usual) on the US Consumer (as consumption accounts for 70% of US GDP). The odd thing is that despite lockdown and widespread economic collapse (30mio US unemployment claims filed in the last 5 weeks!), “consumer confidence” has fallen nowhere near as low as in 2008 (see graph below). Granted, when asked about the “present situation” (orange line) confidence has fallen dramatically. But it is still well above 2008-lows. But more importantly, when asked about “future expectations” (blue line), the Great American Consumer is still quite optimistic. Which means that the onslaught of negative economic data in May could reduce consumer spending even further. I therefore follow the “Sell in May and Go Away” adage - so no equity (beta) risk in May, except a few idiosyncratic stock picks on the back of Covid and energy/oil (now is a fine moment for stock-pickers … same is true for Distressed Credit and Special Situations). Otherwise all my legacy positions unchanged (long Gold, long Steepeners, long inflation, long GBP, some EU spread wideners) with profits taken in long credit protection and long vol. As I have been saying since February: “stay light, nimble and liquid”. Figure 8: China’s Annual National People’s Congress, Source: Macro Eagle, May 2020 Have a great May … stay safe … help those who need help … and MAY THE MARKET BE WITH YOU. 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. 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