Month: November 2020

US equity and bond markets are at face-value in disagreement over how ‘great’ whatever headline you choose to consider descriptive of the current state of play with the election.

Stocks are soaring, led by growthy mega-tech names…

And bonds are aggressively bid with long-end yields down dramatically overnight…

So WTF is going on?

Well, first things first, what happened overnight was the end of the ‘blue-wave’ massive-stimulus spend narrative, which has a definite ‘deflationary’ impact on the economy…

And that has forced and unwind of the reflation trade and a reversion into growth stocks…

Furthermore, as Charlie McElligott had warned, the massive ‘crash risk’ positioning into the election was always going to act as a catalyst for volatility collapse if the worst case scenario did not occur.

“I too have pounded the table on the idea that a lot of this sticky vol from over-hedging “crash” event risk could then mechanically “slingshot” Equities higher into the year end, particularly as tail-risk passes and hedges are then unwound back into the market bc those options will be decaying hard into imminent expirations.”

And that’s what we’re seeing in VIX…

“So in the sense that last night saw us clear said “left-tail” crash-risk of a shock “Blue Wave” and the negative long-term implications of “magnitude” higher taxes and re-regulation, we are then rationally beginning to see implied vols and “Vol of Vol” get hammered and helping my thesis realize today (UX1 -2.9 vols, VVIX -16.7), which to me confirms that Vanna flows alone are going to be very supportive of higher Equities prices from here, especially as divided government will keep the pressure on the Fed to maintain max “easy” financial conditions going-forward in the background”

On the bond side, clearly a deflationary impulse is ‘bullish’ but there is a massive, record, overhang of short positioning that is about to (or is already) feeling serious squeeze pain…

“The bond market was efficiently priced for a blue sweep and potential for higher deficit spending,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA. Now, “it is looking less likely that we will have the final results soon. So you are seeing a flight to safety as bond investors brace for uncertainty.”

A record short by a long way…

The US election was supposed to pave the way for a sell-off in Treasuries as a blue-wave spending spree sparked inflationary excess, but the opposite has happened in a race that remains too close to call (stripping us of concerns surrounding the long-term negative implications of higher taxes and wholesale re-regulation of US industry) and has killed the blue wave narrative.

“The close fight has raised the specter of contested elections and thrown doubts over fiscal stimulus,” said Eugene Leow, a fixed-income strategist in Singapore at DBS Group Holdings Ltd. “Depending on how messy things get, 10-year yields can drop to the 0.7%-0.75% area in the short-term.”

Yields on the 10-year Treasury bond fell nearly 14 basis points, the largest daily drop in seven months

“The short Treasuries trade is really coming back to bite,” said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne.

“Investors are clearly pricing in a ‘no blue wave’ scenario,” a higher possibility of a Trump victory and a more fiscally conservative stance, he said.

And so that’s why both bonds (deflationary regime and short-squeeze) and stocks (growth rotation and crash-risk unwind) are both soaring this morning…

For now, it’s “buy all the things”, but as Simon Harvey, a foreign-exchange analyst at Monex Europe, warned, “a partisan deadlock can be as bad, if not worse, for markets than this prolonged period of uncertainty.”

It “will only lead to markets downgrading their global growth outlook further.”

Authored by Michael Maharrey via SchiffGold.com,

How will the outcome of the US election impact the price of gold moving forward?

Of course, there is no way to know for sure. US politics is just one of the myriad factors that influence the gold market and you never know how things will play out. But there are reasons to believe the future will remain bullish for the yellow metal no matter who ends up sitting in the Oval Office.

As of Wednesday morning, the election was still up in the air. But one thing is clear. It’s not going to be the Biden landslide many expected.

US stock markets rallied Monday and Tuesday before the election on the expectation of a Biden victory and Democrat control of both houses of Congress. This seems counter-intuitive. After all, Biden has promised higher corporate taxes. We know Democrats tend to favor tighter regulations. This hardly seems like an ideal scenario for businesses, and by extension, stocks. But the markets don’t seem to be particularly concerned about the actual economy. It’s all about fiscal stimulus. And most people believe we’ll get the biggest stimulus package the quickest if Democrats control everything in Washington D.C.

But the reality is we’ll almost certainly get stimulus no matter who wins. This economy is built on stimulus. The powers that be will ensure the stimulus spigot stays open. Trump has already said he wants a stimulus package even bigger than Democrats were calling for. And if for some reason they can’t work out a post-election stimulus plan, the Fed will remain poised to inject printed money into the economy. We’ll get more monetary stimulus regardless.

And this is good for gold. Whether the stimulus comes from Congress, or the Fed, or both, the end result is more quantitative easing. That means more inflation. And ultimately inflation is better for gold than it is for stocks.

Big Picture

Historically, the party controlling the White House has had very little effect on the price of gold. According to a World Gold Council Report, dating back to 1971, gold returns were 11% on average per year during Democratic presidencies and 10% during Republican administrations.

Gold returns have been higher in the year following a change of party in the White House, but only marginally. When the challenger wins, gold returns have averaged 6.5% compared to a 7.9% return when the incumbent wins.

The WGC report also points out that while the US is a large market, it is not the sole driver of gold demand. Gold is a global market. The US accounts for only about 7% of physical gold demand. China and India dominate the market, with the Chinese accounting for about 26% of demand and India making up 22%. As the WGC report put it, “There is still a large portion of physical gold demand that is influenced by global dynamics well beyond the US election.”

Of course, American politics does have a major impact on the global economy and world markets, so we can’t simply discount what happens in the US as irrelevant. Nevertheless, the economic dynamics in play won’t shift significantly with the outcome of the presidential election.

Trump nor Biden will wave a magic wand and fix the economic destruction inflicted by government actions in response to the COVID-19 pandemic. The wounds are deep. Neither man will stop overleveraged companies from shutting down. Neither man will put people back to work. All they can do is borrow and spend money – which we’ve already shown is good for gold.

And neither man will alter the monetary policy of the Federal Reserve.

The central bank has already promised it will keep interest rates at zero for years to come. It will continue QE infinity. It has made clear it plans to ignore any inflation threat. And there is no exit strategy from this extraordinary monetary policy. The printing presses in the Eccles Building will continue to churn out dollar bills. It is setting the stage for a major collapse in the dollar and Biden nor Trump will change that.

In my view, that’s the ball you need to keep your eyes on. Presidential politics will be window-dressing. Not irrelevant, but a sideshow. The real action is at the Fed.

The return to schools in the US was memorably fraught with doomsayers like Dr. Fauci who at times allied with unions (particularly in America’s biggest districts like in LA, Chicago and New York) to force mayors to agree to lengthy delays of in-person education unless they acquiesced to measures on staffing and resources intended to ensure “teacher safety”.

Months later, the controversy that surrounded President Trump’s attempt to force schools around the country to reopen, something that the media raised a major stink about (accusing the president of endangering the nation’s children for the sake of something as trivial as “the economy”) has all but faded.

A surfeit of testing in the US and across Europe that was carefully monitored and studied by researchers has been carried out. And as Bloomberg reports, positivity rates in places like NYC were “extremely low” – less than 0.2%.

Though we never saw the surge in cases that some feared reopening schools might trigger, infection rates in schools have more or less tracked the rates from their surrounding community.

“You can’t really pull the school out from the community,” said Walter Gilliam, an education policy researcher at the Yale School of Medicine. “The biggest part of this, really, is how do you keep transmission rates in a county to a level that the schools even have a chance? If the transmission rates are too high, there’s just almost nothing they could do to keep it from getting into schools.”

So far, the data show that children are not major spreaders of the virus a) among themselves b) among each other and c) among their parents.

If rates of spread in the community are high, then rates in the schools will be high. This is the reasoning that undergirds decisions in France, Germany etc. that revived most of the restrictions from the springtime lockdowns, with the exception of the schools.

These trends hold true around the world, not just in the US. Research by a third-party nonprofit called Insights for Education examined data from 191 countries and found that the trend was virtually the same everywhere, with rates of infection in K-12 school systems mirroring rates in the surrounding community.

Other early evidence similarly suggested that schools don’t inherently become virus hot spots. Insights for Education, an independent foundation that advises education departments and ministries, examined data from 191 countries between Feb. 10 and Sept. 29 and found “no consistent pattern between school status and infection levels.”

In Spain, a second wave of the virus began before schools reopened. One analysis there found that in one region cases dropped three weeks after schools reopened, in one region cases stayed flat and in others case numbers continued rising at the same rate. A new project that is collecting data on reopenings in the U.S., the COVID-19 School Response Dashboard, examined data from more than 5,000 schools across all 50 U.S. states and found that at a late-September peak, about 3% of schools reported outbreaks of five or more infections.

But, seeing as this is a Bloomberg report, the reporters note that just because ‘the experts’ were wrong about COVID-19 and its risk to the public education system doesn’t mean they were wrong about…well…everything else, too.

In the US, school openings have been complicated and confused by a White House that has downplayed the risks of in-person instruction and federal agencies that have never issued clear guidelines for safe practices. That’s left policy-making to state and local governments that are rushing to respond to the changing virus and what’s learned about it.

Whether it’s safe to open schools, said Rainu Kaushal, a clinical researcher at Cornell University’s medical school, Weill Cornell Medicine, in New York City, depends largely on two factors: How serious the spread of the virus is in the community and how seriously the community is taking precautions against the virus.

She said schools also need to be nimble.

“This virus situation evolves so rapidly that one can only make the best decision for the next few weeks,” she said. “And then you really have to take stock again.”

To be sure, while K-12 schools haven’t proved nearly as dangerous as advertised, college students remain a risk, with reports on college campuses showing large universities around the country becoming veritable petri dishes of disease. Epidemiologists will be watching the numbers as the winter progresses to see whether the virus continues to intensify heading into the new year, or whether rates finally begin to subside.

While the rest of the world is focused on banning internal combustion engines, one manufacturer seems to be showing that demand for them is still robust: Ferrari.

The luxury automaker, whose CEO this week said he didn’t think the company would ever completely give up on internal combustion engines, posted a surprise earnings beat on Tuesday morning that sent its stock soaring 7% during the session. 

And the company’s earnings weren’t just a signal that the market isn’t done embracing ICE vehicles; it was also a statement that the automotive recovery, at least among the super-rich, is in full swing. After all, people have to spend their newly-printed PPP money somewhere, right?

The company posted $1.08 per share in earnings on $1 billion in sales on Tuesday morning. The company’s bottom line beat analyst expectations, which were set at 96 cents, and the top line met expectations. The company’s operating profit margins also rose 0.2% on the year.

During the quarter, Ferrari shipping 2,313 vehicles. While this number was down slightly, by 161 units, from the year prior, the company said it wasn’t due to Covid, according to Barron’s. Instead, management placed the blame on something far more innocuous: “product cadence”. 

Sequentially, the company’s earnings showed a stark recovery from the pandemic. Vehicle shipments were up by more than 900 vehicles over Q2, when the company lost 7 seven weeks of production due to Covid-19 in Italy. 

Recall, we have noted that the overall auto market has recovered significantly since the worst days of the pandemic in Q2. In China, the world’s largest auto market, we noted just days ago that there was a “sense of euphoria” in auto dealerships as they recovered.

New vehicle sales were up 17% to 2.6 million in September as a result of massive government intervention and spending on infrastructure projects. Sales of commercial vehicles and buses were up 40% as a result. Light vehicle sales were up 8% for September, approaching 2.1 million. 

 

 

We noted back in early September that if China is truly the leading indicator globally, a V-shaped recovery could be in store for the rest of the world in coming months. China’s vehicle sales rose to 2.18 million units in August, according to preliminary data released by the China Association of Automobile Manufacturers and Bloomberg.