Risk sentiment was buoyant to start the week, and for many, that will be some combination of frustrating and confusing.
It’s not “supposed” to be this way, after all. Hasn’t anybody heard about the depression? Did nobody listen to Jerome Powell on “60 Minutes”? The Fed chair himself said the recovery may take until the end of 2021 even if he refused to countenance use of the “D” word. Without a vaccine, he said, a “full” recovery may not be possible.
Of course, he also said the Fed’s capacity to do more under emergency lending powers has “no limit“. And investor psychology is benefitting from the lifting of figurative and literal shutters across the US and Europe. People are back in bars (for now) and back on beaches (although some are donning masks, which will make for highly amusing tan lines). California is 75% of the way open. US equity futures are now nearly 5% off last week’s lows.
And don’t forget about crude. Oil is coming off a third straight week of blockbuster gains, and was up sharply again Monday with prices now back above $30. That’s a reflection of demand hopes tied to reopenings, but also the supply response, as OPEC+ implements cuts and US drilling plunges to lows not seen since the dawn of the shale revolution.
Gold, meanwhile, is supported, as talk of negative rates in the US and the UK refuses to go away. The BOE is leaving the door open to a sub-zero bank rate and although Powell again pushed back on the idea of implementing NIRP stateside, STIRs won’t be so easily dissuaded from pushing the envelope – especially not when they understand their own role in perpetuating a self-fulfilling prophecy.
Carefully-polished, yellow doorstops are also getting a boost from the dour economic outlook and the assumption that at some undefined future time, inflation will surge (I know, I know).
Who knows, maybe we’ll be at $25,000 in no time.
On negative rates, critics abound and supporters are in short supply. “Their track record, quite simply, is poor and provides plenty of circumstantial evidence that their damage to confidence and financial stability far outweighs the benefits”, Morgan Stanley’s Andrew Sheets said over the weekend. “Since the eurozone and Japan implemented negative rates in June 2014 and January 2016, respectively, both regions have seen greater underperformance of their stock markets, economic growth, loan growth and bank valuations than the US”.
The incoming data will continue to be poor – obviously. Japan officially sank into a recession in Q1, when the economy shrank 3.4%, an outcome that was actually better than expected. Q4 was, of course, marred by the tax hike and a typhoon. With a Q1 contraction now in the books and Q2 set to be horrific for obvious reasons, the world’s third-largest economy is set for three consecutive quarters in contraction – much like the world’s fourth-largest economy.
The BoJ has pledged to do more. And they already have. Late last month, the bank removed limits on bond buying, and in March stepped up purchases of ETFs. But Kuroda seems hesitant to push rates further into negative territory.
Abe is under pressure to keep the fiscal stimulus taps open. Japan has avoided the worst of the virus, but its economy remains under pressure, and lackluster external demand will add to the problems. Exports plunged 22% in Q1.
In any event, remember that equities “pull forward” expected future outcomes, so even if it’s true that most people think the post-COVID reality will look markedly different than the world we’re all used to, right now a combination of policy support, heavy lifting from the tech titans, an unclench higher out of Op-Ex and that familiar FOMO feel, is seemingly making a retest of the March lows less and less likely.
Former trader Richard Breslow had some amusing commentary to kick off the new week that captures the points made above. I’ll leave you with a couple of brief excerpts from his daily note.
Equities ceasing to go down is hurting so many feelings. Legendary people, we are told, don’t want to buy at resistance. They would prefer better entry points. And that is taken as meaning more than the obvious. Companies are struggling at the moment and their P/E ratios are too high. We can only use this quarter as the benchmark. We are still facing lockdown restrictions and if I’m unhappy, the stock market darn well better be too. Have you noticed, that today, no one seems to be writing that it is risk-on? That’s seen as too annoying. It’s a “melt-up,” just to convey the proper scorn. Last week was the “worst” since, whenever. Well, the tail end of March. Which sounds less impressive than being able to cite the Lehman collapse. You don’t have to be a mathematical genius to eyeball an SPX chart and conclude we’ve gone nowhere for over a month. It’s going to have its good days along with the bad until that changes.