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Caveat Emptor.

Of course, all the usual disclaimers apply.

Just about everything that could have gone right did go right for US equities to start the new week.

Jerome Powell set the tone with what amounted to a pledge of unlimited support for the economy via the Fed’s emergency lending powers. His remarks came during an otherwise somber interview with “60 Minutes”, which was filmed last Wednesday, but aired in full on Sunday evening.

A trio of additional bullish catalysts contributed to the euphoric vibe.

  1. First, oil surged another 10% on top of a furious three-week rally, with Monday’s leap aided by news that demand in China has returned to pre-virus levels
  2. Second, optimism around a vaccine added to the good vibes engendered by pictures of happy beachgoers and packed bars in states where lockdowns have been lifted
  3. Third, the icing on the cake came from Angela Merkel and Emmanuel Macron, who together floated a joint plan for a €500 billion European recovery fund, a move clearly designed to nudge recalcitrant politicians in hawkish eurozone nations to support burden-sharing when it comes to facilitating a bloc-wide recovery

“The fund is meant to be temporary, funded by the EU through borrowing on the markets and will be part of the next EU multiannual budget”, ING writes, noting that it’s designed to “provide direct fiscal stimulus through grants and funds will go to the industries and regions of the EU that have been most hit by the crisis”.

“With their new proposal, Germany and France appear to have crossed the Rubicon on sharing the financial pain from the pandemic”, Bloomberg opinion columnist Ferdinando Giugliano wrote Monday afternoon. “The shift by the Germans from their usually conservative position is all the more noteworthy, and the financial markets certainly see it that way”.

Italian yields plunged, and bunds sold off, bear steepening the German curve. Monday was among the best sessions for European equities in a decade and the BTP-bund spread narrowed more than 22bps on the day.

The euro rose the most in weeks, which in turn pressured the dollar lower, adding to the bullish cross-asset impulse.

Christine Lagarde, speaking to Handelsblatt, Les Echos, Corriere de la Sera and El Mundo, called the news “ambitious, targeted and, of course, welcome”.

The ECB has been at pains to promote fiscal unity in the face of the crisis and has pledged to buy more than €1 trillion in assets in 2020. Even as the central bank comes under fire from a German high court, the market still sees total purchases for this year summing to €1.5 trillion by the time it’s all said and done.

That’s a lot of heavy lifting, so any sign that fiscal policymakers are prepared to take some of the burden off monetary policy is a huge relief for Lagarde.

“Every fiber in my body wants to short German bunds because this seems to finally be the moment where Europe comes together under a single fiscal roof”, Kevin Muir, formerly head of equity derivatives at RBC Dominion, and better known for his exploits as “The Macro Tourist” wrote, in his daily note. “I am not going down that road anymore”, he went to promise. Here’s a short excerpt from Kevin:

I have seen this play out too many times. European leaders make steps towards a fiscal union, the market gets all excited, and then in a few days, political reality sets in like the breath-stealing-whoosh of the Ice Bucket challenge.

Shorting the bund is a widowmaker. This time may be different – but it’s not a trade anyone will be excited about getting into.

In any event, this is a serious step towards a fiscal union in the eurozone and that, in turn, means markets have one more “game changer” to ponder.

The myriad bullish catalysts produced the best day for US stocks since early April. Small caps had one of their best sessions versus the S&P 500 in a decade.

Needless to say, all of the above is bearish for bonds, and generally conducive to a steeper curve. Long-end yields cheapened materially in the US, steepening the 2s10s and 5s30s by more than 5bps.

In the simplest possible terms, the week started on a dramatically pro-cyclical note.

Of course, all the usual disclaimers apply. Sino-US tensions are worsening materially. The “here and now” (if you will) reality for the US economy is that tens of millions of people have lost their jobs in the space of eight weeks. Fed officials have warned that a wave of bankruptcies looms. The outlook for corporate earnings is the most uncertain it’s ever been. And, now, there’s a new firestorm in Washington, after Donald Trump on Monday admitted to dismissing State department IG Steve Linick as a personal favor to Mike Pompeo.

If you’re buying, caveat emptor.


9 comments on “Caveat Emptor.

  1. I’m no expert on anti-viral vaccines, but I learned how to read when I was four, and I haven’t forgotten how, at least to date. The Moderna vaccine produced binding antibodies in the two groups of fifteen for which they reported data, and significantly more binding antibodies in the group which received higher doses of the vaccine. In all fifteen individuals in each case. They didn’t report on the highest dosage group. Binding antibodies are present in persons who are infected, they’re a marker that the person is infected. But they do nothing to prevent infection. Neutralizing antibodies prevent infection–binding antibodies are also referred to as non-neutralizing antibodies, so the distinction is pretty clear. When a neutralizing antibody binds itself to a virus, it renders it impotent, and unable to infect. Only four of the fifteen individuals in the low dose and higher dose groups showed the presence of neutralizing antibodies, so this hardly seems an overwhelming success. Again, Moderna showed no data from the highest dosage group. Party on, Wayne.

    • I’m pretty sure CNBC reported in midafternoon that the highest dosage caused high fevers in the folks to whom it was administered, and that Moderna has decided not to proceed with testing at that dosing level.

      • Three grade 3 adverse effects (AEs) in 250 micro-gram dose cohort – described as flu like symptoms after second dose. 3 of 15 is too high, and the lower doses apparently looked good to them, so 250 um dose is axed and they added a 50 um dose arm.

    • Scott Frew: On Tuesday afternoon your suspicion was echoed. Great call, sir!

    • Thanks, where did you read this information?

  2. Neutralizing antibody data was only available for the first four patients in each 15-person dose cohort; no indication they were or weren’t present in the other 11.

    This sort of partial disclosure is irritating but trial run by NIAID and new Warp Speed Czar is from Moderna so data disclosure isn’t going to follow best practices . . .

    • Clear as mud.

      Anyway, their Monday morning pump attempt worked beautifully.

      Now all they need to do is follow it up with more tangible, unequivocally positive progress. Fairly quickly.

      Seems like the thresholds for success get harder to clear from here, going forward.

      Nonetheless, I am wishing them luck and Godspeed.

      • Yes Prestwick, perfectly executed.

        It was amazing to watch TSMC stock rise over 4% hours after they announced they would refuse orders from Huawei. That customer is one of TSM’s two largest accounts.

        Luckily for them the other is Apple, which must be comporting since they are atop the list of Bejing’s frequently mentioned retaliation candidates. (Along with Boeing, which rose almost 13%.)

        I noticed the same for another stock I was pondering adding to my buy “hot list” until I saw that Huawei & Apple were also their two top customers. That one rose 6.6% today.

        Caveat Chumpter, indeed.

  3. H-Man, yes let the buyer be aware. The horizon is clouded as to what comes next. In the words of Socrates, “The hour of departure has arrived”.

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