We all agree that this was an amazing week in capital markets, but can we agree on what is happening?
I will leave my comments, for now, so let’s start with the economic data from around the world because many of you believe that the ending of global COVID-19 lockdown orders led to economic data reports that were encouraging. Obviously, investor sentiment plays a big role in the termination of a bear or bull phase, and the economic data reports are always used to build narratives that are read by the public.
Economic data during the first week of June
On Sunday and Monday, apart from the Italian May Manufacturing PMI number, which rose from 37.1 to 45.4, there was not a single international economic report that was supporting the continuation of higher equity prices. Of course, many investors know that such data is typically lagging or at best coincident information.
The tide turned mid-day Tuesday, June 2. However, the economic data on Tuesday was unremarkable.
On Wednesday, the Italians reported a substantial drop in unemployment following a relaxation of their lockdown. Later that morning the ADP Nonfarm Employment Change for May was expected to be down -9 million jobs but was reported to be down just -2.76 million, which would have been a shocker except that this report always takes second fiddle to the US Department of Labor report that comes on Friday. Then there was a reported fall in US Crude Oil inventories to -2.077 mil barrels from an expected gain of +3.038, which opened some eyes. That enthusiasm was tempered a bit by growing inventories of distillates. There was an improvement in ISM Non-manufacturing business activity, but that is not a market-moving report.
So, I conclude that either Wednesday’s economic data was known on Tuesday by insiders and acted upon illegally or that the Fed and other central banks were moving into action on Tuesday, which also would have been seen first by the commercial bankers.
On Thursday, the European Central Bank (ECB) announced a blockbuster US$1.5 Trillion money printing plan. No other news was that important.
On Friday, the world was waiting on the US Jobs Report. As reported, there had been an expected drop in May’s Nonfarm payrolls of -8 million but was an actual gain of +2.51 million. The fuse was lit. No other data on Friday mattered.
Market changes
The big day in the market happened on Tuesday, June 2. That was when the 10-year US Treasury yield began to soar from about 0.65 to almost hit 1.0% three days later on Friday morning.
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What I saw happening and was writing about in the blog
The risk-off trade that has been slowing the rise of equity prices and favoring bonds and gold for many weeks was being terminated, at least for now, as money was being pushed into risk-on equities. I noticed it first in the bank stocks on the Australian and UK markets. I saw the prices of oil stocks starting to rise. The major Goldminers were getting sold, ahead of the smaller ones, so I could see this was a big-money move. By Friday morning, I showed a list of how the four biggest US bank stocks had rapidly pulled the S&P 500 index stocks higher.
America’s Big Banks are kick-starting the equity market
Thanks to the Fed’s easy money support of the financial sector, the prices of all the major banks of America have been soaring, and as a consequence, the market indexes are rising and making the economy look a lot better than is the case.
Here are the 1-week and 1-month market gains
Dow 30 +3.5% and +10.3%
S&P 500 +2.8% and +8.8%But now look the same period gains of the major banks
BAC +7.7% +18.2%
C +13.2% +26.6%
JPM +6.6% +15.7%
WFC +11.0% +14.8%The performance difference is striking
June 5, 2020 8:00 am
Was this phenomenon the result of macroeconomic factors or simply a push by the powers-that-be, i.e., by the central banks and governments of the world and their spinmeisters, but especially by the Fed and the White House?
Macro-economics, I think from the reported data I just reviewed, had little to do with what happened in capital markets on Tuesday. I think it was the fuel needed to continue the equity market rally. The government of the US did its part with a remarkable Jobs Report that later may be corrected. No doubt in my mind; this was Interventionist Week.
I believe the Fed got the ball rolling by announcing they were going to slow their purchases of US Treasuries. The immediate effect is for bond investors to sell in the market, which lifts the yields, which improves the profitability outlook of the banks. Simultaneously, the Saudi Arabian and Russian governments announced that at their OPEC+ meeting today, they would like the members to extend the production cuts policy that has been in place. That narrative added further pressure on rising oil prices, which investors see as a sign of recovery from the economically crushing pandemic. Meanwhile in America amid the most socially tense fortnight in several generations following the May 25 death of George Floyd, an African American, the White House decided to focus investor attention instead on the end of the lockdown and the return to work. The nation’s primary concerns relating to COVID-19 cases and deaths, which are reaching staggering totals, had already been pushed back by the President’s removal from public view of the White House Coronavirus Task Force.
So, with all these important elements coming together, investors were being set up to receive the May US Jobs Report on Friday morning before the market open. The carefully manufactured narrative was that unemployment figures would soar. The report stated the opposite. Investors were hooked.
But the question now to be answered is, were they hoodwinked?
The Jobs Report itself comes from the Administration. It is a series of estimates upon estimates and seasonally adjusted factors. At the best of times, it is a poor guestimate. At the worst of times, the Administration is known to over-estimate jobs growth and later adjust the figures down. So, this question of being hoodwinked by a highly motivated White House that has recently ramped up its reelection political campaign is entirely possible but will take weeks to see the matter play out.
An earlier test of investor sentiment will come out of today’s OPEC+ meeting. Should Iraq and others vocally oppose the continued production cut-backs policy of Saudi Arabia and Russia, then oil prices will likely fall, and investor confidence would then be shaken. There could even be a return to substantial risk-off buying of bonds and gold. We will be watching the oil market closely early next week.
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In America, the funeral of George Floyd will attract many leading politicians and social activists in what is expected to become the focal point of a global effort to end racial discrimination, a process that will take a generation or more, but needs to start somewhere and at some time. The memorial services on Thursday (Minneapolis) and today (North Carolina) will be followed by a major service on Monday in Houston and the funeral on Tuesday. The seriousness of this matter cannot be overstated. History is being made. The world is watching and like the protest rally in London and other international cities today, the protest in support of racial equality will become globally pressing. US political campaigns and capital markets will take second and third billing this week.
Meanwhile, the US Dollar index, which peaked at about 103.96 on March 23 at the height of the equity market sell-off, has rapidly fallen to below 97 under the weight of humongous money printing by the Fed and gargantuan economic recovery bills passed by Congress and the Administration.
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The question of whether there will be more money printing and government economic recovery bills, I think is a certainty. Printing and spending will continue unabated. Politically, both parties will likely speak early this week to the need to address massive spending programs intended to improve jobs for African and Latino Americans. These speeches will be a direct response to the emotions being elevated at the George Floyd funeral. As a result, I think the US Dollar will continue to fall, which is typically support for Oil and Gold.
Where is the equity market going from here?
Will investors be risk-on (higher) or off (lower)? There are three key factors.
- I think that today’s OPEC+ meeting member agreement to extend the production cut another month will further support the recent six-week rise in Crude Oil to $39.55 (WTI) and $42.30 (Brent). But investor focus will now shift to demand, as well as on sales in the futures markets by Oil producers who are on the financial ropes. So, oil prices may slow their recent rise, which may put the brakes on the S&P 500 rally.
- I think the political pressure from the George Floyd factor to increase spending in a big way will cause the US Dollar to fall, which ought to hold up the price of oil a bit, and put some measure of support to the price of gold. But the falling Dollar helps increase US exports and decrease imports, and increase net Foreign investment, which will support the S&P 500, at least from excessive profit-taking.
- Central bank action. The big player now will be the central banks. Will the Fed continue to support the commercial banks by staying out of the bond market thereby allowing the treasury yield to continue lifting to 1.0% or higher? If so, the equity market will continue its present bull trend. But now that Trump on Friday took credit for the equity market rally, there is no further pressure on the Fed to continue their money printing support of his political agenda. I think the Fed will now await further coronavirus data to see if the return to work actions of government is going to again elevate the COVID-19 deaths and employment issues. If so, the 10-year US Treasury yield should drop down a bit, pushing back on risk-on trading and causing more bonds and gold to be bought.
We will be watching the data, but as a guess, I conclude that equity prices will stall early this week as investors watch the social and political dramas play out. The economic data is understood to be too unreliable to continue to hook investors as was the case on Friday.
That is the thing about capital markets. We never have long to see the results of our analysis and conclusions.
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