Oh, Lord (Byte Dancing Into August Volatility)

Lord & Taylor filed for Chapter 11 on Sunday in Richmond, Virginia, a stark reminder of the dire circumstances facing the hardest-hit sectors of the US economy, which we now know contracted an unthinkable 32.9% (annualized, of course) in the second quarter.

The oldest US department store joins the likes of Neiman Marcus and J. Crew in seeking bankruptcy protection after pandemic lockdowns laid waste to retailers already struggling to adapt to a rapidly evolving operating environment.

Alongside energy, the retail sector suffered disproportionately in the first half of the year. Tailored Brands (of Men’s Wearhouse and Jos. A. Bank fame) is reportedly preparing a bankruptcy filing as well.

The latest corporate COVID casualty comes as lawmakers struggle to craft an agreement on a comprehensive package for new virus relief. On Sunday, Nancy Pelosi said she does not necessarily trust the information emanating from Deborah Birx, who months ago muscled Anthony Fauci out of the way to become The White House’s preferred spokesperson on the epidemic.

Market participants are staring down at least three key data releases in the week ahead, with ISM manufacturing, jobless claims, and July payrolls on deck. Rates are well aware that recent trends suggest the US economic recovery is stalling, but equities haven’t yet received the message. Stocks are up against at a daunting seasonal in August, which typically sees heightened volatility and lackluster liquidity.

“Mobility data could provide the best looking glass as we shift into August”, AxiCorp’s Stephen Innes said over the weekend. “Most global mobility restrictions trackers are no longer improving, and consumer spending is plateauing. Watch out for the summer swoon”.

Meanwhile, all eyes will be on the dollar and gold after the greenback suffered its worst month in a decade, while precious metals soared as real US yields pushed deeper into negative territory and Donald Trump floated the idea of delaying the election, raising more concerns about the dollar’s reserve status.

As a reminder (and I suppose you don’t need one), de-dollarization is a glacial process. Barring an actual (i.e., literal) attempt by Trump to seize authoritarian powers, the market isn’t simply going to decide, overnight, to pick another reserve currency.

“No, the USD is not even close to losing its reserve status and there is no real alternative to it”, Nordea’s Andreas Steno Larsen wrote Sunday, adding that,  

Reserve managers will ask the following questions when picking a reserve currency; i) Is there a big, safe and liquid underlying bond market? ii) Is the currency used as a settlement asset in cross border trade? and iii) is the currency relevant for FX intervention purposes? The USD is a clear yes on each of the three questions, while the EUR is moving in the right direction on i) and iii).

On the year, gold has outrun pretty much everything with the exception of the FAAMG cohort.

“If you think gold’s holy trinity will remain in play (Fed policy geared towards depressing real yields, the US dollar status as a reserve currency in question, while the COVID-19 headline reel continues to spin), you need to own gold as key portfolio diversification”, AxiCorp’s Innes went on to write.

You should note that the picture looks a bit different if you look at returns since the Fed’s emergency actions in March, but the snapshot below gives you the YTD view.

Trump is set to make a decision on banning TikTok Monday or Tuesday, Fox reported over the weekend. Talks around a Microsoft acquisition are ongoing and the company says it may invite other US investors on for the potential deal.

ByteDance, meanwhile, issued a statement late Sunday affirming its commitment to “becoming a global company” and insisting that it “strictly abides by local laws”. It also claims it’s the victim of “plagiarism and defamation” perpetrated by Facebook.

Read more: Trump To Drop Hammer On TikTok As Microsoft Said To Show Interest

That’s your geopolitical flashpoint for the next few days, and according to Mike Pompeo, this isn’t going to stop with TikTok.

“Whether it’s TikTok or WeChat, there are countless more”, Pompeo told Fox. The president “will take action in the coming days with respect to a broad array of national security risks that are presented by software connected to the Chinese Communist Party”, he added. Pompeo delivered a highly inflammatory speech last month just as the consular wars heated up. You can expect more abrasive rhetoric in the coming days.

For what it’s worth, lawmakers generally support the prospective Microsoft acquisition. “If the company [and] data can be purchased [and] secured by a trusted US company that would be a positive [and] acceptable outcome”, Marco Rubio mused. “What’s the right answer? Have an American company like Microsoft take over TikTok”, Lindsey Graham tweeted. “Win-win.”

Satya Nadella has spoken to Trump, Microsoft said Sunday. “Microsoft fully appreciates the importance of addressing the President’s concerns”, a company statement reads. “It is committed to acquiring TikTok subject to a complete security review and providing proper economic benefits to the United States, including the Treasury”.

Coming back to the virus, Bloomberg’s Garfield Reynolds writes that “investors continue to trade the short-term course of the pandemic instead of long-term economic impacts, so the default expectation is further gains into year-end as the development of vaccines and treatments progress”.

As alluded to in that brief passage, Reynolds harbors serious reservations about a potential disconnect between risk assets and structural damage to the global economy. “I retain a conviction that, as data normalizes into next year beyond current comparison windows, it will become clear that stocks are pricing an economic future far removed from reality”, he went on to say, in a lengthly missive.

Finally, it’s worth noting that some analysts are beginning to wonder whether we’re conceptualizing of the pathogen properly.

“[The] resurgence intensified the talk about a second wave, though in some ways attempting to distinguish between discrete waves may create an impression of a behavioral pattern by the virus that is less representative of its underlying behavior”, JPMorgan’s Nikolaos Panigirtzoglou says, in a new note. “In particular, it can create parallels with seasonal viruses like the flu when the last few months suggest COVID-19 infections may be less seasonal”.

We may know even less than we think we know — and we don’t think we know much.


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4 thoughts on “Oh, Lord (Byte Dancing Into August Volatility)

  1. Sure, the virus has dealt a hammer blow to retailers, but so have greedy landlords and feckless mayors and city council members in the pocket of real estate developers. Before we pound the last nail in the coffin of real-world retailers, ask yourselves: How many items have you bought online over the last five months that weren’t as advertised, didn’t fit, were cheaply made, and were next to impossible to return? Online retail is having a great run, but this too shall pass (or revert to something like a mean). #ShopLocal

    1. Your defense of brick and mortar retailers is spirited (and commendable). That said, the comeback that you are predicting would be akin to a resurrection. The retail wars are essentially over and are currently already in the mop up phase.

      There will always be a place for brick and mortar retail establishments for perishable goods along with any number of other niches (from big ticket items to luxury goods, etc..). However, any sort of reversion to a mean between the current state of retail and the halcyon days of malls and superstores is a pipe dream.

      As a footnote, returns on Amazon are fair and easy.

    2. I own part of a small town main street retail store and July 2020 sales were up 15% over July 2019. This is in spite of the fact that we reduced store hours, restricted the number of customers in the store at any given time, and we are having problems ordering in certain product lines so are struggling to keep the store stocked. I am not sure what is going on but I am afraid it is going to end if congress does not act.

NEWSROOM crewneck & prints