Duncan Donald

Fri, Jun 5

The Euro plays catch up as the ECB shows its better late than never

The year of 2020 has continued to show twists and turns as we deal with events that have never been seen before.  This has brought complete disparity from the “norm” as we must ignore typical market behaviors and react to the market that is in front of you. This week brought two obvious examples of exactly that.


In the US where for the last 8 weeks we have seen multiples of millions of fresh unemployed on a weekly basis, this week we have seen the continuation of surging stock markets as there seems an intention to recoup all of the February and March downside in the Major indices, with the Dow Jones and S&P 500 within touching distance of not only the years highs, but all time highs, with the Nasdaq having broken them.  This feels even more staggering when we look at the domestic disharmony on display in most states across the US.  How can US stocks be so attractive? The answer comes in the shape of not just the stimulus we have seen, but the warnings that they have another $4-7 Trillion ready to pump if needed.  This has meant that whilst many companies in the US on paper are way overvalued against their balance sheet, the buyers still come.


What seems undeniable is the fact Trump is axed on having the stock market as high as possible, seeing surging stocks as his benchmark of success as we head into the November elections. But his recent handling of the Covid-19 situation and now his handling of the racial disharmony will stand against him. So, as we weigh up the potential outcomes for November the question remains, what problems will the then president have to deal with, and inflationary pressures scream out as the biggest worry of stimulus of this magnitude.  For now, as a trader one key discipline that can't be ignored is don’t fight the trend, but perhaps post-election if not before, as the real damage to businesses of the Covid situation becomes known, we could see a significant shift in the markets. At this moment tech and leisure seem to be where investors are seeking value, even with leisure companies still locked down, and even as the fears of a “second wave” seem to be dissipating, the short term outlook for bookings and business normalization seem bleak.


The second example of disparity came as we finally saw the European Central Bank step up their stimulus measures. After a warning from Christine Lagarde the ECB head last week that they were poised to act, starting the wave of Euro buying as we saw rotation from safe haven currencies. Despite her warning, Thursdays meeting remained wide open for eventualities, with consensus opinion being that we saw Euro 500 billion announced there were concerns we could see a more cautious approach of Euro 250 billion or perhaps more optimistically 750 billion with it broadly expected rates remain unchanged. What transpired was a strong package and delivery from Lagarde as she announced Euro 600 bln, showing strength but leaving just enough ammunition should it have been needed, bringing significant appreciation in the currency market as the Eur/Usd rate jumped from 1.1000 to 1.1400 with the Eur/Jpy rate jumping from 119 to nearly 125 at its highest point. 


So again in typical divergence from the norm we saw huge Quantitative Easing bringing currency gain as the inflation/deflation issues normally brought by QE remain ignored.  But, there certainly seems to be a market shift towards Europe, as it emerges first from the virus lockdown, and with high level portfolios underweight in Euro denominated investments the moves have been corrective towards what we have seen in the US. 


In the UK, despite the improvements in infection rates and deaths, we remain well behind Europe, with one day this week the UK deaths totalling the entirety of European cases. However progress is being made, and steps to enforce public to wear PPE on public transport, shows the government are preparing for a return to work, with many businesses targeting a start of July resumption.  The Pound has gained against the US Dollar this week, but that seems more of a weak Dollar story, with the Brexit negotiations again suffering delay and confrontation as the EU looks to extend the negotiating period and UK officials adamant they must be completed this year. 


Friday's unemployment data from the US brought another surge in equities as it seems the market shrugs off the bad news and jumps on any glint of hope as the US unemployment rate surprisingly fell in May. This turn in data is fuel to hopes that the unemployed number is topping out as headline unemployment fell from 14.7% to 13.3%, with the non-farm payroll number climbing by 2.5 million jobs after the fall of nearly 21 million seen last month. It will be interesting to see what impact this has on Jerome Powell’s Federal Reserve’s narrative when they meet next Wednesday, which will likely be the key volatility point next week.