Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
As this week as last one price action was very narrow, we had have to be focused on daily/intraday setups. Among major events were multiple PMI reports in different countries, earning reports, ECB measures on economy support and few occasional things, such D. Trump words on Iranian gunboats attack if they prevent US navy ships movement etc., WTI crude futures negative price and some others.
Still, the major things are the same - earning reports as they provide information on the term of crisis, set liquidity dynamic and investors' sentiment.
The euro fell to its lowest in a month on Thursday after data showed economic activity in the euro zone virtually halted by government-imposed lockdowns to stop the coronavirus pandemic. IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI) sank to by far its lowest reading since the survey began in 1998.
The euro was last at $1.07795, with investors awaiting the result of a meeting of European Union leaders on the bloc’s response to the economic turmoil caused by the pandemic. The summit will bring a move towards joint financing to help the bloc recover from a forecast deep recession caused by the pandemic by asking the European Commission to propose a fund big enough to target the most affected sectors and regions. But uncertainty remains over how far EU governments will be prepared to share the burden.
“The proposed Recovery Fund could help, but a lot will depend on its size, conditions and debt mutualization,” Bank of America analysts wrote. “We do not see a strong consensus to mutualize this debt.”
UK preliminary PMI readings for April fell far below even the most pessimistic forecasts.
Most major economies have launched enormous fiscal stimulus packages, a mixture of cash and loans or loan guarantee schemes. Leading the pack is Germany, that staunch defender of fiscal probity these many decades. The German strategy, of resisting calls for fiscal stimulus in normal times but responding in scale in extremis, makes a lot of sense. Because German government debt (at least if you exclude contingent liabilities arising out of the euro system) is relatively low, the multiplier on fiscal loosening over the medium term is likely to be higher than elsewhere, at a time when it really needs to be. Other countries who have played the fiscal card in more normal times might come to regret it now.
The European Central Bank is set to spend just over a trillion euros on asset purchases this year alone, has eased its rules on what it can buy and when, and has stepped up supportive measures for banks to prevent the coronavirus crisis from hammering the economy. But is it enough? That’s the question ECB President Christine Lagarde is sure to face after Thursday’s central bank meeting in the news conference to be held via a conference call.
Analysts estimate that at the current daily pace, the ECB’s 750 billion euros of emergency bond purchases will be exhausted by October. Some say the ECB will be left with no option but to top up its scheme by a further 500 billion euros soon — perhaps as early as Thursday.
For sure, rising government borrowing costs in the periphery led by Italy means pressure to act is building once again — not least as European governments struggle to agree details of their own emergency stimulus plan.
Shareholders in European banks have had their share of nasty surprises since the coronavirus pandemic knocked global markets off record highs and quashed the value of the sector by over 45% in less than a month.
Lenders, which governments have ordered to freeze dividends and move to the front line of the worst economic crisis in living memory, have emerged as the unequivocal top stock market losers of the crash, faring even worse than travel and leisure stocks.
Now investors are bracing themselves to find out in the coming days just how many billions have European banks set aside for loan losses and the overall cost of the coronavirus crisis.
Over the past 30 days, analysts have revised their expectations for loan-loss provisions in 2020 by Europe’s most important banks upward by almost 130%, according to a Reuters analysis of Refinitiv data.
With the additional stress of the oil price crash in mind, investors are waiting for Deutsche Bank, Barclays, HSBC, UBS and Santander to unveil their impairment.
Even after Friday’s gains, the euro remained short of the high of $1.0846 touched on Thursday on hopes that a European Union meeting on Thursday to build a trillion-euro emergency fund would yield concrete results.
“After four consecutive sessions of lower daily lows, EUR-USD has perked up on the back of pre-weekend short covering,” Ronald Simpson, managing director, global currency analysis at Action Economics, said in a note.
Despite an agreement by EU leaders to fund a recovery from the coronavirus pandemic, delays to an agreement on divisive details of the European Union’s stimulus package has kept investors from turning more bullish on the euro.
French President Emmanuel Macron said differences continued among EU governments over whether the fund should be transferring grant money, or simply making loans.
“Just as with a second marriage, the euro’s rally turned out to be a triumph of hope over experience,” said Karl Schamotta, Chief Market Strata at Cambridge Global Payments in Toronto. “European leadership disappointed once again, failing to reach an agreement on a collective rescue package,” he said. “This means the euro area is likely to lag the United States in the race to recover,” said Schamotta.
Earning reports show optimistic sentiment among investors, but it seems that market underestimate the risks and the heaviness of current situation. Here is what we've got:
Equity markets remain volatile as investors digest the virus impact on earnings reports. Scraping earning calls transcripts for clues, Fathom earnings margin pressure tracker suggests that companies are facing an even harsher environment than in 2008 in the aftermath of Lehman’s collapse.
Fathom shows, that equity markets remain volatile amid sharp deteriorations in economic data and investors slowly digesting the impact of the virus on earnings reports. Comparing current analysts’ earnings revisions to the peak-to-trough revisions in the previous two recessions betrays a significant level of optimism in today’s valuations. Outside of Europe, in particular, earnings expectations appear especially conservative given the magnitude and uncertainty associated with the current pandemic and compared to a relatively benign recession like 2001. While market prices tend to bottom two to three months before earnings expectations, it is possible that these modest earnings revisions may not be consistent with a market trough yet.
Indeed - just compare EPS drop in previous two crisis and now. The same we could see in equity index behavior.
It is perhaps of little surprise that investors appear uncertain how to price the medium- to long-term consequences of the COVID-19 pandemic. The S&P 500 dropped more than 30% from its peak in late February in the space of a few weeks, far outpacing anything seen during the Global Financial Crisis. But by close of business yesterday, it was just 19% below its 19 February reading. That matches more or less precisely the hit to global GDP in our most optimistic scenario, for this year alone. On that basis, we see significant downside risks to equity prices from here.
So you could compare how it was in 2007 and how it stands now. Initial drop was stronger than in 2007. But even in 2007 market was needed 16 months to hit the bottom. It means that real earnings and companies' reports should become much worse in nearest 3-6 months, as they lag for few months behind the price action.
Indirect confirmation of that is significant drop in liquidity:
Liquidity has collapsed across all markets to a level last seen during the Great Financial Crisis, according to Fathom’s proprietary Liquidity Indicator, derived from the average discount in closed-end funds. This is classic liquidity trap territory: investors are pulling liquidity from the market, holding onto their liquid assets, in order to have enough liquidity to tide them over in the event of a collapse in activity. That behaviour, writ large, ensures that the collapse in activity occurs, their income falls, and consequently they still do not have sufficient liquidity — so they save even more. The appetite for private savings increases, but the quantum of private savings might not change or might even fall because of the impact that saving behaviour has on income. It is precisely in circumstances like this that Keynesian fiscal stimulus is fully justified.
Last week we already said that Net speculative position on S&P 500 futures has collapsed miserably. Market still stands depressed since then. Last time position was at this level in 2016 - 2017.
As a bottom line of fundamentals, it might be unclear why we pay a lot of attention now to stock market and companies' earnings? Previously we never did this. Because they provide information that we can't get elsewhere. Statistics appear too slow and lag behind real market. While stock market shows the reality - liquidity runs out of the market and stocks futures position stands net short, while earnings drop anticipation is too conservative. Investors expect less drop, compares to 2008 crisis, while S&P shows stronger drop in first 3 months. Here is an obvious contradiction.
This contradiction points that markets and investors should meet cruel reality in 2-3 coming months and see that their expectations are underestimate the real negative impact. This in turn, has direct relation to currencies. Because any negative surprises that show stronger crisis situation should support US Dollar. It makes long-term bullish bets on EUR/USD pair doubtful, to say the least. Besides, disagreement in major EU political centers makes even more difficult to apply necessary supportive measures in time. I have real doubts that EU economy will be less hurt by the pandemic than US one.
Next week we will keep an eye on Fed meeting as well. About ECB meeting we've said above. Meanwhile, on Wednesday, the focus will shift to the U.S. Federal Reserve’s monetary policy meeting. In recent months, the Fed has slashed rates to near zero, restarted bond purchases and rolled out an unprecedented range of programs to keep credit flowing and shore up business and household confidence, bulging its balance sheet to a record $6.42 trillion.
While the meeting is expected to be less dramatic than the emergency one in March, investors expect to get more details on the Fed’s special lending programs, its asset-purchase program and the forward guidance on the target range for the federal funds rate, analysts said. Now Reuters poll suggests that Fed balance sheet will reach $10 Trln. by the end of 2020:
It seems that markets are underpricing the risk of a more severe economic downturn with a protracted recovery. The relative optimism in markets is driven in part by aggressive monetary and fiscal stimulus across the developed world; the risk is that this stimulus – especially on the monetary side – is sufficient to placate investors but will not be enough to avert crisis in the real economy. Based on the amount of corporate credit outstanding in the short term, particularly in foreign currency, and therefore at risk of cash-flow crunches, certain European countries appear most at risk. At Fathom, we have held a bearish stance on credit for over a year. We now see the risk that, reassured by the Fed’s monetary splurge, investors are sleepwalking into a nasty downside surprise to unwind their latest cautious optimism.
Technicals
Monthly
Guys, if you let me, I skip the picture here, as it stands the same as last week. I just can attach 10 pics to the post and I do not want to split report in two parts...
In general market has spent the week in relatively tight range that makes no impact on monthly chart. So, as we've said - technically EUR direction depends on breakout. On monthly chart we have doji, that is also the bullish grabber.
Interestingly, that doji levels coincide with Pivots support and resistance levels as well. Downside breakout opens road to the parity, while upside break should open road for equal doji distance to upside - somewhere to 1.23 area. Still, taking in consideration fundamental background it seems that EU is paralyzed in making any decision as countries are not united on the face of common tragedy. Despite outstanding liquidity injection, the consequences of pandemic not necessary should be tragic. Demand for USD could hold for awhile.
Despite of bullish grabber, in fundamental environment that we stand now, it is difficult to imagine driving factors for EUR appreciation. As we said, in a longer term, our major indicator is the Dollar Index chart, or better to say historical resistance level that will provide the direction. This is all time K-level. As you understand, its breakout or reversal out from it will be major event for FX market. Thus, in nearest time, until breakout will happen we mostly will deal with shorter-term setups of a smaller scale.
Weekly
Weekly chart also doesn't show too many changes. Trend still stands bearish here, and previously we've talked a lot about bearish signs. Despite that potentially it could be diamond shape, market doesn't show necessary bullish performance and too long stands near the bottom that puts the shadow on bullish perspective. Today I would like to add just one moment. In general the shape of consolidation suggests wide price swings that theoretically should be symmetrical or show at least some degree of symmetry. It means that solid upward swing should have to happen, but we do not see it. Instead of that market shows just puny pullback out from the bottom and turns down again. And I ask you - whether it could be failure of upward action, early reversal that cares bearish further, showing the sign of coming downside breakout?
Daily
This chart you already saw in our recent video. Market shows reaction on our COP target. Next downside target is 1.06, as we've said on Friday, but now we're mostly interested in upside reaction. Market has completed few intraday targets as well - XOP on 4H chart, formed butterfly and AB=CD pattern that gives us "222" Buy setup here, on daily.
Still, as this is just COP, upside should not be too strong and should stuck at one of the resistance level but in no way it should overcome "C" point. This is absolute condition. Breaking the "C" point will open area for further upward continuation. That's being said, potentially we have two setups right now. Bulls could consider scalp buy, following "222" with 1.0890 target and K-area, while bears should keep an eye on the same level for short entry.
Intraday
Here is just schematic shape of how upside action could happen. MACD divergence is in place. Thus, bulls could consider possible AB-CD action, supposedly in a shape of H&S pattern. Its OP target stands very close to daily K-resistance area. This would be probably the first stop on a way up..
Conclusion
Data shows mismatch of markets' view on recovery to ongoing processes in political and economical spheres, as well as market behavior. It could be the sign that investors underestimate consequences of pandemic for global economy. This, in turn, means that markets could surprisingly meet deterioration of situation which should trigger more demand for US Dollar. Disagreement in EU core also doesn't add optimism for Eurozone.
In short-term, we consider market pullback and stability of our bearish view. Particular speaking, whether market will be able to stay below 1.10...
As this week as last one price action was very narrow, we had have to be focused on daily/intraday setups. Among major events were multiple PMI reports in different countries, earning reports, ECB measures on economy support and few occasional things, such D. Trump words on Iranian gunboats attack if they prevent US navy ships movement etc., WTI crude futures negative price and some others.
Still, the major things are the same - earning reports as they provide information on the term of crisis, set liquidity dynamic and investors' sentiment.
The euro fell to its lowest in a month on Thursday after data showed economic activity in the euro zone virtually halted by government-imposed lockdowns to stop the coronavirus pandemic. IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI) sank to by far its lowest reading since the survey began in 1998.
The euro was last at $1.07795, with investors awaiting the result of a meeting of European Union leaders on the bloc’s response to the economic turmoil caused by the pandemic. The summit will bring a move towards joint financing to help the bloc recover from a forecast deep recession caused by the pandemic by asking the European Commission to propose a fund big enough to target the most affected sectors and regions. But uncertainty remains over how far EU governments will be prepared to share the burden.
“The proposed Recovery Fund could help, but a lot will depend on its size, conditions and debt mutualization,” Bank of America analysts wrote. “We do not see a strong consensus to mutualize this debt.”
UK preliminary PMI readings for April fell far below even the most pessimistic forecasts.
Most major economies have launched enormous fiscal stimulus packages, a mixture of cash and loans or loan guarantee schemes. Leading the pack is Germany, that staunch defender of fiscal probity these many decades. The German strategy, of resisting calls for fiscal stimulus in normal times but responding in scale in extremis, makes a lot of sense. Because German government debt (at least if you exclude contingent liabilities arising out of the euro system) is relatively low, the multiplier on fiscal loosening over the medium term is likely to be higher than elsewhere, at a time when it really needs to be. Other countries who have played the fiscal card in more normal times might come to regret it now.
The European Central Bank is set to spend just over a trillion euros on asset purchases this year alone, has eased its rules on what it can buy and when, and has stepped up supportive measures for banks to prevent the coronavirus crisis from hammering the economy. But is it enough? That’s the question ECB President Christine Lagarde is sure to face after Thursday’s central bank meeting in the news conference to be held via a conference call.
Analysts estimate that at the current daily pace, the ECB’s 750 billion euros of emergency bond purchases will be exhausted by October. Some say the ECB will be left with no option but to top up its scheme by a further 500 billion euros soon — perhaps as early as Thursday.
For sure, rising government borrowing costs in the periphery led by Italy means pressure to act is building once again — not least as European governments struggle to agree details of their own emergency stimulus plan.
Shareholders in European banks have had their share of nasty surprises since the coronavirus pandemic knocked global markets off record highs and quashed the value of the sector by over 45% in less than a month.
Lenders, which governments have ordered to freeze dividends and move to the front line of the worst economic crisis in living memory, have emerged as the unequivocal top stock market losers of the crash, faring even worse than travel and leisure stocks.
Now investors are bracing themselves to find out in the coming days just how many billions have European banks set aside for loan losses and the overall cost of the coronavirus crisis.
Over the past 30 days, analysts have revised their expectations for loan-loss provisions in 2020 by Europe’s most important banks upward by almost 130%, according to a Reuters analysis of Refinitiv data.
With the additional stress of the oil price crash in mind, investors are waiting for Deutsche Bank, Barclays, HSBC, UBS and Santander to unveil their impairment.
Even after Friday’s gains, the euro remained short of the high of $1.0846 touched on Thursday on hopes that a European Union meeting on Thursday to build a trillion-euro emergency fund would yield concrete results.
“After four consecutive sessions of lower daily lows, EUR-USD has perked up on the back of pre-weekend short covering,” Ronald Simpson, managing director, global currency analysis at Action Economics, said in a note.
Despite an agreement by EU leaders to fund a recovery from the coronavirus pandemic, delays to an agreement on divisive details of the European Union’s stimulus package has kept investors from turning more bullish on the euro.
French President Emmanuel Macron said differences continued among EU governments over whether the fund should be transferring grant money, or simply making loans.
“Just as with a second marriage, the euro’s rally turned out to be a triumph of hope over experience,” said Karl Schamotta, Chief Market Strata at Cambridge Global Payments in Toronto. “European leadership disappointed once again, failing to reach an agreement on a collective rescue package,” he said. “This means the euro area is likely to lag the United States in the race to recover,” said Schamotta.
Earning reports show optimistic sentiment among investors, but it seems that market underestimate the risks and the heaviness of current situation. Here is what we've got:
Equity markets remain volatile as investors digest the virus impact on earnings reports. Scraping earning calls transcripts for clues, Fathom earnings margin pressure tracker suggests that companies are facing an even harsher environment than in 2008 in the aftermath of Lehman’s collapse.
Fathom shows, that equity markets remain volatile amid sharp deteriorations in economic data and investors slowly digesting the impact of the virus on earnings reports. Comparing current analysts’ earnings revisions to the peak-to-trough revisions in the previous two recessions betrays a significant level of optimism in today’s valuations. Outside of Europe, in particular, earnings expectations appear especially conservative given the magnitude and uncertainty associated with the current pandemic and compared to a relatively benign recession like 2001. While market prices tend to bottom two to three months before earnings expectations, it is possible that these modest earnings revisions may not be consistent with a market trough yet.
Indeed - just compare EPS drop in previous two crisis and now. The same we could see in equity index behavior.
It is perhaps of little surprise that investors appear uncertain how to price the medium- to long-term consequences of the COVID-19 pandemic. The S&P 500 dropped more than 30% from its peak in late February in the space of a few weeks, far outpacing anything seen during the Global Financial Crisis. But by close of business yesterday, it was just 19% below its 19 February reading. That matches more or less precisely the hit to global GDP in our most optimistic scenario, for this year alone. On that basis, we see significant downside risks to equity prices from here.
So you could compare how it was in 2007 and how it stands now. Initial drop was stronger than in 2007. But even in 2007 market was needed 16 months to hit the bottom. It means that real earnings and companies' reports should become much worse in nearest 3-6 months, as they lag for few months behind the price action.
Indirect confirmation of that is significant drop in liquidity:
Liquidity has collapsed across all markets to a level last seen during the Great Financial Crisis, according to Fathom’s proprietary Liquidity Indicator, derived from the average discount in closed-end funds. This is classic liquidity trap territory: investors are pulling liquidity from the market, holding onto their liquid assets, in order to have enough liquidity to tide them over in the event of a collapse in activity. That behaviour, writ large, ensures that the collapse in activity occurs, their income falls, and consequently they still do not have sufficient liquidity — so they save even more. The appetite for private savings increases, but the quantum of private savings might not change or might even fall because of the impact that saving behaviour has on income. It is precisely in circumstances like this that Keynesian fiscal stimulus is fully justified.
Last week we already said that Net speculative position on S&P 500 futures has collapsed miserably. Market still stands depressed since then. Last time position was at this level in 2016 - 2017.
As a bottom line of fundamentals, it might be unclear why we pay a lot of attention now to stock market and companies' earnings? Previously we never did this. Because they provide information that we can't get elsewhere. Statistics appear too slow and lag behind real market. While stock market shows the reality - liquidity runs out of the market and stocks futures position stands net short, while earnings drop anticipation is too conservative. Investors expect less drop, compares to 2008 crisis, while S&P shows stronger drop in first 3 months. Here is an obvious contradiction.
This contradiction points that markets and investors should meet cruel reality in 2-3 coming months and see that their expectations are underestimate the real negative impact. This in turn, has direct relation to currencies. Because any negative surprises that show stronger crisis situation should support US Dollar. It makes long-term bullish bets on EUR/USD pair doubtful, to say the least. Besides, disagreement in major EU political centers makes even more difficult to apply necessary supportive measures in time. I have real doubts that EU economy will be less hurt by the pandemic than US one.
Next week we will keep an eye on Fed meeting as well. About ECB meeting we've said above. Meanwhile, on Wednesday, the focus will shift to the U.S. Federal Reserve’s monetary policy meeting. In recent months, the Fed has slashed rates to near zero, restarted bond purchases and rolled out an unprecedented range of programs to keep credit flowing and shore up business and household confidence, bulging its balance sheet to a record $6.42 trillion.
While the meeting is expected to be less dramatic than the emergency one in March, investors expect to get more details on the Fed’s special lending programs, its asset-purchase program and the forward guidance on the target range for the federal funds rate, analysts said. Now Reuters poll suggests that Fed balance sheet will reach $10 Trln. by the end of 2020:
It seems that markets are underpricing the risk of a more severe economic downturn with a protracted recovery. The relative optimism in markets is driven in part by aggressive monetary and fiscal stimulus across the developed world; the risk is that this stimulus – especially on the monetary side – is sufficient to placate investors but will not be enough to avert crisis in the real economy. Based on the amount of corporate credit outstanding in the short term, particularly in foreign currency, and therefore at risk of cash-flow crunches, certain European countries appear most at risk. At Fathom, we have held a bearish stance on credit for over a year. We now see the risk that, reassured by the Fed’s monetary splurge, investors are sleepwalking into a nasty downside surprise to unwind their latest cautious optimism.
Technicals
Monthly
Guys, if you let me, I skip the picture here, as it stands the same as last week. I just can attach 10 pics to the post and I do not want to split report in two parts...
In general market has spent the week in relatively tight range that makes no impact on monthly chart. So, as we've said - technically EUR direction depends on breakout. On monthly chart we have doji, that is also the bullish grabber.
Interestingly, that doji levels coincide with Pivots support and resistance levels as well. Downside breakout opens road to the parity, while upside break should open road for equal doji distance to upside - somewhere to 1.23 area. Still, taking in consideration fundamental background it seems that EU is paralyzed in making any decision as countries are not united on the face of common tragedy. Despite outstanding liquidity injection, the consequences of pandemic not necessary should be tragic. Demand for USD could hold for awhile.
Despite of bullish grabber, in fundamental environment that we stand now, it is difficult to imagine driving factors for EUR appreciation. As we said, in a longer term, our major indicator is the Dollar Index chart, or better to say historical resistance level that will provide the direction. This is all time K-level. As you understand, its breakout or reversal out from it will be major event for FX market. Thus, in nearest time, until breakout will happen we mostly will deal with shorter-term setups of a smaller scale.
Weekly
Weekly chart also doesn't show too many changes. Trend still stands bearish here, and previously we've talked a lot about bearish signs. Despite that potentially it could be diamond shape, market doesn't show necessary bullish performance and too long stands near the bottom that puts the shadow on bullish perspective. Today I would like to add just one moment. In general the shape of consolidation suggests wide price swings that theoretically should be symmetrical or show at least some degree of symmetry. It means that solid upward swing should have to happen, but we do not see it. Instead of that market shows just puny pullback out from the bottom and turns down again. And I ask you - whether it could be failure of upward action, early reversal that cares bearish further, showing the sign of coming downside breakout?
Daily
This chart you already saw in our recent video. Market shows reaction on our COP target. Next downside target is 1.06, as we've said on Friday, but now we're mostly interested in upside reaction. Market has completed few intraday targets as well - XOP on 4H chart, formed butterfly and AB=CD pattern that gives us "222" Buy setup here, on daily.
Still, as this is just COP, upside should not be too strong and should stuck at one of the resistance level but in no way it should overcome "C" point. This is absolute condition. Breaking the "C" point will open area for further upward continuation. That's being said, potentially we have two setups right now. Bulls could consider scalp buy, following "222" with 1.0890 target and K-area, while bears should keep an eye on the same level for short entry.
Intraday
Here is just schematic shape of how upside action could happen. MACD divergence is in place. Thus, bulls could consider possible AB-CD action, supposedly in a shape of H&S pattern. Its OP target stands very close to daily K-resistance area. This would be probably the first stop on a way up..
Conclusion
Data shows mismatch of markets' view on recovery to ongoing processes in political and economical spheres, as well as market behavior. It could be the sign that investors underestimate consequences of pandemic for global economy. This, in turn, means that markets could surprisingly meet deterioration of situation which should trigger more demand for US Dollar. Disagreement in EU core also doesn't add optimism for Eurozone.
In short-term, we consider market pullback and stability of our bearish view. Particular speaking, whether market will be able to stay below 1.10...
