Trading Desk Notes - July 6thSubmitted by Polar Futures Group on July 5th, 2019
From the Desk of Drew Zimmerman
It was a week of celebration! Here we celebrated Canada Day, the US celebrated Independence day, but investors had even bigger celebrations as the Nasdaq, S&P and Dow all hit record highs!
It must be nothing but sunny skies ahead for investors, yet this same week German yields were hitting all-time lows with the 10yr hitting negative 0.40%. The US 10yr also traded back under 2%, its lowest level in 2.5 years and there are now over $13 Trillion worth of negative yielding bonds globally. It seems that equity prices are more a product of central bank policy, or the perceived policy action, that is driving investors back out the risk curve and into equities. Below I have highlighted 3 key speeches from Powell, you be the judge if they seemed to be important or not.
Now we know why the market scrutinizes every word that Powell says. Back in October we thought Powell was going to be a different kind of Fed chair who wasn’t going to come in and rescue the markets as Bernanke and Yellen were so willing to do. Oh how silly we were! Investors now seem to believe that the feed not only has the ability to stop stock selloffs in their tracks, but the foresight to prevent any serious selloffs at all! To that point, Howard Marks of Oaktree Capital wrote a great memo last month and there was a particular paragraph that resonated with me regarding the Fed, so I’ve included it below, but I highly recommend everyone go read the entire memo here, it is more than worth your time.
Finally, when I hear people talk about the possibility that the Fed will prevent a recession, I wonder whether it’s even desirable for it to have that goal. Per the above, are recessions really avoidable or merely postponable? And if the latter, is it better for them to occur naturally or be postponed unnaturally? Might efforts to postpone them create undue faith in the power and intentions of the Fed, and thus a return of moral hazard? And if the Fed wards off a series of little recessions, mightn’t that just mean that, when the ability to keep doing so reaches its limit, the one that finally arrives will be a doozy? (Howard Marks- June 12,2019 Memo)
Gold might be starting to get the sense that Howard could be right and the “clear skies” picture being presented by the equity market may be pulling a screen over our eyes. The return of USD strength over the past week and half seems to have capped the rapid move higher in gold for now as gold retested the recent high but got turned back. But while the USD strength is working against gold the move lower in real rates has been helping and I think this will provide further help going forward. Gold fighting back to hold above $1,400 at the end of the week is showing some resilience, but we have had a stampede of investors increasing their net long gold positions by over 170% in June. I think this surge in positioning leaves gold susceptible to a near term move lower as late to the party traders get squeezed a little. However I will be looking for opportunities to get on the long side of gold and think that if / when we go into a risk off market, I think the USD and gold could both perform well at the same time.
The Canadian dollar has performed well over the past month trading up over 2.5 cents from the lows. The fact that it has held the highs even during the recent USD strength is telling. This strength has been on the back of much better Canadian economic data signaling the slowdown at the end of last year and beginning of this year may be subsiding. This has allowed Canadian interest rates to stay much higher relative to the US as the Bank of Canada is not expected to cut rates anytime soon. As good as the Canadian data has been, I am skeptical of how long Canada can “hang on” to this outperformance and I think that at the first sign weakness Canada would have to “catch up” in terms of interest rate moves that could see a sharp move lower in CAD.