Developed Countries

Special Report

Highlights PORTFOLIO STRATEGY While our cyclically sanguine broad equity market view remains intact, we are cautious on the short-term prospects of the S&P 500, until the election uncertainty lifts. A contested election and legitimacy crisis is possible in the US, but the constitutional system is robust and the likely risk-off phase would be temporary.  A depreciating US dollar, China’s rebounding economic activity, improving domestic operating metrics and compelling valuations all signal that it no longer pays to be bearish chemicals equities. An improving export backdrop, a depreciating greenback and commodity price inflation, labor cost discipline at home, along with a relative value proposition, all argue for an above benchmark allocation to the S&P materials sector. Recent Changes Lock in gains in the S&P chemicals index of 1% since inception, and upgrade to neutral today. Boost the S&P materials sector to an above benchmark allocation today. Feature Equities made fresh recovery highs last week cheering promising vaccine news, optimism on a fiscal package extension and a resumption in the Fed’s balance sheet expansion. Easy monetary and loose fiscal policies remain the key macro drivers of equity returns. Yet, the deeper we dig in the concentration of SPX returns the more worried we become. The top five stocks in the SPX (AAPL, MSFT, AMZN, GOOGL & FB) have added $4.82tn to the S&P 500 market cap since 2015, whereas the bottom 495 stocks have added $3.82tn. In percent return terms, these five tech titans’ market capitalization has gone up roughly four fold or 288% over the past 5 ½ years from $1.67tn to $6.49tn. In marked contrast, the S&P 495 market cap has barely budged, rising a mere 23% (increasing from 16.57tn to $20.39tn) during the same time frame (top panel, Chart 1). If investors have not been in these tech titans, then they have not really participated in the SPX’s run up. The measly return since 2015 in the Value Line Arithmetic index and negative return in the Value Line Geometric index gauging the mean and median US stock, respectively, corroborate our analysis (not shown). Clearly, such a steep divergence is unsustainable and the longer these handful of stocks defy gravity the steeper their eventual fall will be (bottom panel, Chart 1). While our cyclically sanguine broad equity market view remains intact, we are cautious on the short-term prospects of the S&P 500, until the election uncertainty lifts. Chart 1S&P 5 Versus S&P 495 Following the recent Special Report we penned with our sister Geopolitical Strategy publication on a potential Democratic Party sweep in the US election, this week we address a common question from clients: What is the risk that President Trump refuses to leave the White House despite losing the election? We interpret this question more generally: What if the election is contested? A Contested Election? The odds of a contested election and legitimacy crisis are not small – they are bigger than a mere tail risk – perhaps 15%. However, at present all polling information and economic data suggest that President Trump will be defeated soundly, thus making a contested election unlikely (Chart 2). Our quantitative election model used to rank New Hampshire, Pennsylvania, and Wisconsin as “toss up” states, in which Trump had a 45%-55% chance of winning the state. Our latest update of the model, with June economic data, contains zero toss-up states, implying that Trump has less than a 45% chance of winning any of these states, or even Florida. The model projects that Trump will lose, receiving only 230 Electoral College votes (Chart 3). If the election were held today, there would be little risk of a contested outcome. The risk of a contested election hinges on Trump making a big comeback between now and November 3 that would tighten the election in at least two swing states (e.g. Florida and the Midwestern states). This is not impossible if one accepts our base case that he gets another ~$2 trillion in fiscal stimulus passed through Congress in early August and the V-shaped economic rebound continues. Chart 2Polling And Economic Data Suggest Significant Victory For Biden Chart 3Quant Model Also Points To Trump Loss And Zero Toss-Up States A tighter race could then produce vote recounts and judicial interventions in one or more swing states on November 3-4. In an environment of extreme polarization, either President Trump or former Vice President Joe Biden would refuse to concede while recounts are underway and their vast armies of lawyers dispute the results in court. We assess that the risk of a Trump comeback and victory is about 35%-42%, so the 15% risk of a contested outcome is a subset of that 35%-42% probability. Our quantitative model gives 17% odds to a scenario in which Pennsylvania, Florida, Minnesota, and even Colorado become toss-up states again. This scenario serves as a proxy for a contested election because it creates several chances for contested results. The model also gives surprisingly high odds to an Electoral College tie of 269-269 votes due to the fact that several scenarios involve swing states that could produce this result.1 If the margins of victory prove narrow, like in 2000, then it is virtually certain that the losing candidate will not concede the election until votes have been recounted at least once. Extreme levels of political polarization combined with abnormal voting circumstances (COVID-19, mail-in voting, etc) suggest that results are more likely to be contested than usual. How would a contested election be resolved? In general, the constitution is more effective than the consensus holds. The market is likely to overreact, creating a buying opportunity for risk assets. The US possesses the world’s oldest continuously operating constitution. It is very robust. The Supreme Court and Congress will intervene, if necessary, to determine the succession of the presidency. The Supreme Court would intervene to settle disputes over recounting votes as it did in 2000. Already this year the high court has intervened to prevent “faithless electors” in the Electoral College, reducing one major source of uncertainty. The core institutions of the state would uphold the result. Similarly, Congress would intervene in the event of an Electoral College tie. Specifically the House of Representatives would vote to determine the next president. The voting procedure would involve each state delegation receiving a single vote. As such it would favor the Republican candidate despite the fact that the Democrats have a majority of seats in the House. The military is sworn to protect the constitution and would be available to enforce the transfer of power once the constitutional branches have spoken. But it is highly unlikely that the occupancy of the Oval Office would have to be effected by federal armed forces. Grievances on the losing side would persist for a long time and take a toll on the legitimacy of the next administration. This is particularly the case if Democrats lose, given that they are likely to win the popular vote. This could have market implications – e.g. driving a weak president to act abroad because he is constrained at home. But the state would have a legal leader and would continue to function. Financial markets would not be as confident or knowledgeable about the constitution so they could panic during a constitutional crisis. We fully expect volatility to rise (as mentioned in a recent webcast in case of a stalemate), risk assets to sell off, and safe haven flows to increase throughout the process of a contested election (bottom panel, Chart 4). Traditionally, the US dollar and US Treasury bonds rally during politically induced risk-off periods (second panel, Chart 4). Since COVID-19 we have seen counter-trends in which investors veer away from the USD due to the narrowing in interest rate differentials and the booming twin deficits. So the short-term reaction may be at odds with the long-term trend. We would expect the greenback to rally during the rise in uncertainty and then collapse once the final decision is determined. This is what occurred in 2000, with the exception of USDJPY (Chart 5). Chart 4Heed The… Chart 5…2000 Election Parallels Therefore, we would position for the USD to be flat, or up, in case of a deadlock in this year’s election (middle panel, Chart 4), and for the 10-year Treasury bond and other safe haven assets to catch a bid. However, cyclically the path of least resistance is lower for the trade-weighted US dollar. Gold should also perform well (fourth panel, Chart 4). First, gold generally rallies during political and geopolitical crises. Second, gold stands to benefit if a US constitutional crisis prompts global investors to diversify from the US dollar specifically. Third, a contested election does not change the fact that both candidates are fiscally profligate and the ultimate winner of the White House will double down on economic stimulus to help consolidate power and fend off the recession. In other words, a contested election is not deflationary, so gold should benefit. A Closer Look At Markets During The 2000 Election Crisis Taking a closer look at the 2000 election impasse is instructive. The top panel of Chart 4 shows that the SPX drifter lower in the aftermath of the election falling roughly 10%. Granted, stocks were also deflating from the dotcom bubble bust. Thus, it is reasonable to expect turbulence going into the election and in the weeks following the election. The equity volatility curve concurs as VIX futures currently have a hump for the months of September and October (Chart 6). Chart 6Buy December VIX Futures As A Hedge One way to play a contested election is to buy the December VIX futures and short the January ones at a positive carry. Alternatively, buying the December futures straight up as a hedge to long equity positions makes sense, but that is a more expensive proposition. Geopolitical Strategy is going long December VIX futures versus the January ones. Defensive sectors caught a bid (with the exception of telecom services that were deflating alongside their TMT bubble peers, Chart 7), while technology and financials (the two largest S&P 500 sectors at the time) suffered a sizable setback (Chart 8). Chart 7Sector Performance… Chart 8…During Last Contested Election Surprisingly, within deep cyclicals, tech bore the brunt of the fall. Chart 8 shows that industrials, materials and energy stocks were on the ascent in November 2000. As a reminder, we recently downgraded financials to neutral and while we recommend a benchmark allocation in tech stocks we continue to have a barbell portfolio approach preferring software and services to hardware and equipment. Moreover, we remain overweight the unloved and undervalued industrials and energy stocks, and this week we are lifting exposure to a modest overweight in the niche S&P materials sector by locking in gains and upgrading the heavyweight chemicals subgroup to neutral. Lift Chemicals To Neutral… It no longer pays to be bearish on chemicals stocks and today we are booking gains of 1% since inception, and lifting the materials heavyweight S&P chemicals index to neutral. Four key drivers are behind our change of heart: a depreciating US dollar, China’s reflation, improving domestic operating metrics and compelling valuations. Chart 9 shows the close correlation between the EURUSD and relative share prices. In early-May we highlighted that the US dollar was about to give way versus the euro as relative shadow rates started moving in the euro’s favor. We posited that “while the Fed would never admit to it, it is trying to devalue the US dollar and reflate the global economy, which will indirectly boost S&P 500 revenues… as 40% of SPX sales are internationally sourced”. This could not be truer for US chemical manufacturers. Currently exports are sinking like a stone, but the slingshot recovery in the euro suggests that chemical exports will rebound in the back half of the year (bottom panel, Chart 9). China’s ongoing recovery also gives credence to this export rebound thesis. In fact, the Chinese authorities are injecting large amounts of liquidity, which is already bearing economic fruit. Chart 9Preparing For A Positive Chemical Reaction Chart 10 shows that not only is the Chinese manufacturing PMI expanding anew (soft data), but also electricity generation is coming back to life (hard data). This backdrop is a boon to US chemical exports and is neither reflected in sell-side analysts’ relative forward sales nor profit estimates (bottom panel, Chart 10). Chart 10Export Lift Looms On the domestic front, chemicals rail car loads are making an effort to bottom and the surge in the ISM manufacturing survey points to a significant pickup in railroad chemical shipments in the coming months (second panel, Chart 11). Importantly, chemicals industrial production is on the verge of expanding, in marked contrast with overall IP that is still falling at a 10%/annum rate (third panel, Chart 11). On the profit margin front, a big tug of war has enveloped chemicals producers. While selling prices are mired in deflation, executives have been very careful with headcount and continue to adjust input costs to lower run rates (Chart 12). Recent news of Dow Inc. shedding its labor force suggest industry CEOs remain very disciplined and focused on a return to profitability. Chart 11Firming Domestic Conditions Chart 12Big Tug Of War Importantly, the American Chemistry Council’s Chemical Activity Barometer is corroborating all this marginally firming industry data and signals that relative forward profitability is likely nearing a trough (bottom panel, Chart 11). Tack on a fall below the neutral zone on our relative Valuation Indicator and it no longer pays to be bearish chemicals manufacturers (bottom panel, Chart 12). In sum, a depreciating US dollar, China’s rebounding economic activity, improving domestic operating metrics and compelling valuations entice us to lift the S&P chemicals index to neutral. Bottom Line: Crystalize gains of 1% in the S&P chemicals index since inception and upgrade to neutral. The ticker symbols for the stocks in this index are: BLBG S5CHEM – LIN, APD, ECL, SHW, DD, DOW, PPG, CTVA, LYB, FMC, IFF, CE, ALB, CF, EMN, MOS. …Which Boosts Materials To An Above Benchmark Allocation Our S&P chemicals index upgrade to neutral also lifts the S&P materials sector to overweight. We are positioning our portfolio for an eventual equity market sector rotation away from tech stocks and toward traditional deep cyclicals including materials, energy and industrials. We want to be ahead of the curve as we expect a violent rotation and the likely catalyst will be a definitive vaccine breakthrough announcement. Such a backdrop will unlock excellent value in a plethora of deep cyclical names that have been laggards, materials stocks included. Importantly, global mining behemoths are already sniffing out a robust global economic recovery, with BHP and RIO trouncing the global bourses since the March 23 trough (Chart 13). Emerging markets have also started to outperform the SPX in common currency terms, as the demise of the US dollar is becoming a mainstream theme. Chart 13Global Miners Sniffing Out Global Recovery The JP Morgan EM FX index, Bloomberg’s EM Asian currency index (ADXY) and the China-levered AUDUSD are all in V-shaped recoveries, underscoring that global growth will make a sizable comeback as the year draws to a close (top & second panels, Chart 14). The USD debasing will lift materials exports and thus bodes well for the relative profit recovery in this deep cyclical sector (third & bottom panels, Chart 14). Not only will US materials profits get a boost from garnering a larger slice of the global export pie, but also materials revenues will rise on the back of an increase in commodity prices that are priced in US dollars (top & second panels, Chart 15). Chart 14Depreciating Dollar To The Rescue Chart 15Chinese Recovery A Boon To S&P Materials True, China’s insatiable appetite for commodities has taken a small breather, but it would be a mistake to write off this economy and the government’s power to successfully restart its engine. Chinese authorities are working on rekindling growth by injecting significant liquidity in order to jump start the economy. Money supply growth is shooting higher after kissing off the zero growth line earlier in the year. We would not be surprised if M1 growth makes a run for the 2016 highs when it surpassed the 25%/annum mark (third panel, Chart 15). Finally, on the domestic operating front, industry executives have been reining in labor costs of late as the COVID-19 pandemic has wreaked havoc in final demand. The materials sector wage bill is now contracting at 4%/annum a level last seen in the Great Recession. This input cost restraint will underpin industry profitability (bottom panel, Chart 15). All of this positive news will arrest the near uninterrupted de-rating of the niche materials sector that followed the reflex rebound in the aftermath of the GFC. Currently, our relative Valuation Indicator is hovering in the middle of the neutral and undervalued zones an area that has marked previous valuation bottoms five times in the past two decades (third panel, Chart 16). Our materials sector Cyclical Macro Indicator does an excellent job in encapsulating all these moving parts and the current message is positive for relative share prices (second panel, Chart 16). Netting it all out, an improving export backdrop, a depreciating greenback and commodity price inflation, labor cost discipline at home, along with a relative value proposition all argue for an above benchmark allocation to the S&P materials sector. Geopolitical Strategy recommends investors go long materials on a strategic time frame. Bottom Line: Upgrade the S&P materials sector to overweight, today. Chart 16Green Lights Flashing Anastasios Avgeriou US Equity Strategist anastasios@bcaresearch.com Matt Gertken Geopolitical Strategist mattg@bcaresearch.com     Footnotes 1     Assuming the 2020 electoral map stays generally the same as in 2016, an Electoral College tie could be produced by Democrats winning AZ, MI, and either WI or MN; MI, MN, and WI plus NE’s Second District; or PA and MI plus NE’s Second District. Other variations are possible.

Highlights The dollar is on the verge of a significant breakdown. If the DXY punches through 94, it will likely mark the beginning of a structural bear market. The most recent catalyst – fiscal support in the euro zone – has been good news on the “anti-dollar” front. Agreement on the EU recovery fund has underscored a powerful centripetal force for the euro. Because it is a reserve currency, a breakdown in the dollar will amplify the global liquidity surge. This will lead to a self-reinforcing spiral of better global growth, and a weaker dollar. Our long Scandinavian currency basket and long silver versus gold positions have benefitted tremendously from the shift in sentiment. Stick with them. While our technical indicators are flagging the dollar as oversold, any bounce from current levels should be shorted.  Our FX model remains dollar bearish, and is recommending shorting the DXY for the month of August. Feature Chart I-1On A Precipice The DXY index is punching below key support levels and on the verge of a significant multi-year decline. Up until March, the dollar was trading in a narrow band (Chart I-1). With that support now breached, the next key test for the DXY index will be the 93-94 zone, defined by the upward-sloping trend line, in place since the 2011 lows. As the breakdown becomes more broad-based, especially vis-a-vis emerging market currencies, this will cement the transition from easing financial conditions to improving global growth. Our trade basket has benefitted significantly from the shift in market sentiment, especially being long the NOK, the SEK and silver relative to gold. As Chart I-2 shows, while gold and the safe-haven currencies remain this year’s frontrunners, the more industrial metals such as silver and platinum will likely take over the baton by year end. Within the G10 universe, cyclical currencies such as the Australian dollar and the Norwegian krone are now in the technical definition of a bull market. Such a rotation usually signals a genuine and potentially meaningful breakdown in the dollar. Chart I-2The Great FX Rotation Our trade basket has benefitted significantly from the shift in market sentiment, especially being long the NOK, the SEK and silver relative to gold.  Technical indicators suggest the dollar is likely to consolidate losses in the weeks ahead. Our intermediate-term indicator is in the lower decile of its range, and speculators are very short the cross (see US dollar section on page 14). That said, any bounce should be used as an opportunity to establish fresh short positions, contrary to the “buy-on-the-dip” strategy that has worked well over the last decade.  DXY Breakdown: What Has Changed? US dollar weakness has been driven by three interrelated factors: Non-US economies that were initially hit by COVID-19 are well into their reopening phases. Meanwhile, new infections in the US are proving rather sticky. As a result, economic momentum is higher outside the US. This partly explains why the euro is outperforming both the US dollar and the yen (Chart I-3). Money velocity is rising faster outside the US, suggesting animal spirits are being rekindled at a faster pace abroad (Chart I-4). This is evident in capital flows, where some non-US markets have started to outperform. In the classical equation MV=PQ,1 a rise in M has historically been accompanied by a collapse in V, suggesting the economy remained in a liquidity trap. With the fiscal spending spigots now open almost everywhere, a rise in both M and V will be explosive for nominal output. Chart I-3Positive COVID-19 Trends For Europe Chart I-4Money Velocity Outside The US There was significant progress towards a European fiscal union this week, with leaders agreeing to a €750 billion recovery fund. Assuming the agreement is ratified, this will underscore a powerful centripetal force for the common-currency union. As the “anti-dollar,” this is positive for the euro (and negative for the greenback). More on this later. The US economy had been relatively resilient compared to the rest of the world, at least until late. This was in part driven by a late start to state-wide shutdowns. With various US municipalities and states now reversing reopening plans, economic activity abroad is now improving relative to the US. Chart I-5 shows the economic surprise index between the Eurozone and the US is inflecting sharply higher from very depressed levels. Historically, this has usually put a floor under the euro. Similarly, G10 PMIs have bottomed relative to the US. These trends should continue in the months ahead. Chart I-5EUR/USD And Relative Growth How High Can EUR/USD Rise? Agreement on the EU recovery fund was a historic event, not due to the size of the package but because of revealed preferences toward euro membership. For over two decades, the standard dilemma plaguing the euro area was that centralized monetary policy was never a panacea for desynchronized business cycles.2 The lack of fiscal transfers between member nations amplified this problem. With Italian and Spanish bond yields now collapsing towards those in the core, liquidity is flowing to where it is most needed, significantly curtailing euro break-up risk. The key components of the agreement are €360 billion in the form of loans and €390 billion in the form of grants. The money will be borrowed via bonds issued by the European Commission, with maturities of three to 30 years. Repayment will not be due until 2027. The most important component of the deal, the grants, is a de facto fiscal transfer. Going forward, the next catalyst for euro strength must be growth differentials between the euro zone and the US. This will translate into an improvement in the equilibrium rate of interest between the two blocs (Chart I-6). This is quite plausible in a post-COVID-19 world. As a relatively closed economy, the US has tended to have a higher services component to GDP. However, the service sector has been hit much harder by the pandemic due to social distancing measures that will likely remain in place for a while. A more drawn-out services recovery raises the prospect that countries geared more towards manufacturing, such as Europe, Japan and China, could experience better growth (Chart I-7). Chart I-6EUR/USD And The Neutral Rate Chart I-7Service Industries Could Stay Weak For A While Chart I-8The European Periphery Is Competitive Again Internally within the euro zone, a powerful adjustment has already occurred. Unit labor costs in Greece, Ireland, Portugal and Spain are well off their peak. This has effectively eliminated the competitiveness gap with the core that had accumulated over the previous two decades (Chart I-8). Italy remains saddled with a rigid and less-productive workforce, but overall adjustments have still come a long way in plugging a key fissure undermining the common-currency area. The euro tends to be largely driven by pro-cyclical flows. Fortunately for investors, European equities, especially those in the periphery, remain unloved, given they are trading at very cheap multiples. Part of the reason is that most Eurozone bourses are heavy in cyclical stocks that are well into a 10-year relative bear market.3  A re-rating of cyclical stocks, especially banks and energy, relative to defensives could be the catalyst that carries the next leg of the euro rally. This could push the EUR/USD towards 1.20. As higher-beta, the Scandinavian currencies will also benefit. For now, most analysts remain very pessimistic about European profits relative to those in the US, but that could change if the dollar enters a structural bear market (Chart I-9). Chart I-9Relative Profit Revisions Lead EUR/USD Cyclical Or Structural Move? If the DXY punches through 94, it will likely mark the beginning of a structural bear market.  If the DXY punches through 94, it will likely mark the beginning of a structural bear market. The dollar tends to run in long cycles, driven by fundamentals but also confidence. In our report last week, we suggested three indicators for gauging a shift in confidence. The total return of US bonds versus gold: Gold and US Treasurys are competing assets (Chart I-10), with the dollar being the key arbiter, as we argued last week. The TLT/GLD ratio has dropped from over 1.16 to 0.96, putting it at the precipice of bear-market territory. The USD/CNY exchange rate: Tensions are flaring up between the US and China, with the latest being the US government’s closure of China’s Houston consulate. Yet USD/CNY is still holding around 7. As the key arbiter between the dollar and emerging market currencies, a firm yuan limits upward pressure on the greenback. The gold-to-silver ratio (GSR): This correlates well with the dollar, and has absolutely collapsed (Chart I-11). Given similar moves in gold versus copper and oil, it is fair to assume that the global economy is not in a liquidity trap. Chart I-10Gold And Treasurys Are Competing Assets Chart I-11The Gold-To-Silver Ratio Has Collapsed The more important point is that there is a nascent, concerted push by both institutional investors and central banks to diversify out of dollar assets: The S&P 500 usually moves inversely to gold, but both have been moving in sync since the March lows (Chart I-12). This suggests investors have been using gold rather than US bonds to hedge their equity long positions. The dollar proved to be the best safe-haven asset during the March drawdown. With the Federal Reserve having flooded the system with dollars, gold (and precious metals) are the next logical choice. Since 2014, central banks have been aggressively diversifying out of their dollar holdings. This is not only evident in the official TIC data that continues to show foreign officials are selling Treasurys, but within IMF reserve data well. Part of these flows have gone into other currencies, especially the yen, but a huge portion has been to gold (Chart I-13). This has been driven by emerging market countries such as Russia and China, the same concerns in the middle of geopolitical confrontations with the US. Chart I-12Gold And The S&P 500 Are Moving Together Chart I-13Central Banks Are Loading Their Gold Vaults Within our service (and together with our Commodity & Energy colleagues), we have been highlighting that precious metals will be a huge beneficiary from the Fed’s reflationary efforts, even though they are overbought. As a hedged bet, we have been long silver versus gold, a trade that continues to perform well.   As the gold trade becomes crowded and demand for diversification from fiat money remains strong, silver and platinum could be the outperformers.  Chart 14 shows that precious metals such as silver and platinum are much cheaper from a historical perspective. As the gold trade becomes crowded and demand for diversification from fiat money remains strong, silver and platinum could be the outperformers. Chart I-14Silver And Platinum Remain Relatively Cheap In a nutshell, remain long silver, SEK, NOK and petrocurrencies. Currency traders can also add platinum to the list. These top picks will continue to benefit from global reflation, dollar weakness and a breakout in the euro. Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com   Currencies US Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been positive: Existing home sales surged by 20.7% in June compared with May, the highest monthly gain on record. This followed a strong increase in building permits and housing starts last week. The University of Michigan consumer sentiment declined from 78.1 to 73.2 in July, while the Chicago Fed national activity index ticked up from 3.5 to 4.1 in June. Initial jobless claims increased by 1416K for the week ended July 17th, higher than the 1307K increase the previous week. The DXY index continued to edge lower, falling by 1% this week. Our bias is that the US dollar is likely to begin a long depreciation should the global economy continue to rebound.   Report Links: A Simple Framework For Currencies - July 17, 2020 DXY: False Breakdown Or Cyclical Bear Market? - June 5, 2020 Cycles And The US Dollar - May 15, 2020   The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been mixed: The current account surplus narrowed from €14.4 billion to €7.95 billion in May. Headline inflation was flat at 0.3% year-on-year in June. Core inflation also remained at 0.8% year-on-year in June. Preliminary consumer confidence marginally fell from -14.7 to -15 in July. The euro appreciated by 1.4% against the US dollar this week, climbing to the highest level in almost two years, alongside European equities. The catalyst was the €750 billion rescue fund (around 5.5% of EU GDP) announced this Tuesday. The fact that member countries reached an agreement is encouraging for the sustainability of the euro.   Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019   The Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been mostly negative: The trade deficit narrowed from ¥601 billion to ¥424 billion in June. Exports fell by 26.2% year-on-year while imports fell by 14.4% In June. National headline CPI remained flat at 0.1% year-on-year in June, while core inflation was also unchanged at 0.4%. The Jibun Bank manufacturing PMI increased from 40.1 to 42.6 in July. The Japanese yen rose by 0.2% against the US dollar this week. In the monthly report released this Wednesday, Japan’s Cabinet Office reported improvement in 6 out of 14 economic categories, including consumer spending, exports, production and public investment. However, capital spending, corporate profits and employment remain weak due to the pandemic. That said, we are long the Japanese yen as a  safe-haven hedge.   Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020   British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been positive: The Rightmove house price index rose by 3.7% year-on-year in July, up from 2.1% the previous month. CBI industrial trends survey orders recovered from -58% to -46% in July. The British pound appreciated by 1.6% against the US dollar this week. Near-term volatility around Brexit negotiations is a negative for the pound, but it is cheap and unloved.   Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019   Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been mixed: Retail sales rose by 2.4% month-on-month in June, following 16.9% increase the previous month. NAB business confidence fell to -15 from -12 in Q2. The Australian dollar jumped by 2.3% against the US dollar this week. The recent RBA meeting minutes suggested that there is no need to adjust its policy measures in the current environment and reiterated that negative interest rates remain “extraordinarily unlikely”.   Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019   New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 There was scant data from New Zealand this week: The New Zealand business index surged from 37.5 to 54.1 in June. The New Zealand dollar rose by 1.8% against the US dollar this week. Following weak inflation data last week , the Westpac Economic Bulletin suggests consumer prices will remain subdued on weakened demand. This raises the prospect of further stimulus from the RBNZ.   Report Links: Currencies And The Value-Versus-Growth Debate - July 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019   Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been positive: Retail sales increased by 18.7% month-on-month in May. Auto sales were particularly strong. The new house price index increased by 1.3% year-on-year in June.  The Teranet/National Bank house price index rose by 5.9%. Headline inflation increased from -0.4% to 0.7% year-on-year in June, as oil prices recovered. Core inflation also rose from 1.6% to 1.8% year-on-year in June. The Canadian dollar rose by 1.3% against the US dollar this week. The inflation data were stronger than expected, led by gas, food and shelter prices. Going forward, a recovery in energy prices will be important for the performance of the CAD. In general, we like petrocurrencies.   Report Links: Currencies And The Value-Versus-Growth Debate - July 10, 2020 More On Competitive Devaluations, The CAD And The SEK - May 1, 2020 A New Paradigm For Petrocurrencies - April 10, 2020 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been positive: The trade balance widened marginally from CHF 2.7 billion to CHF 2.8 billion in June. Exports rose by 6.9% month-on-month while imports jumped by 7.3%. Total sight deposits continued to increase from CHF 688.6 billion to CHF 691.5 billion for the week ended July 17th. The Swiss franc appreciated by 1.3% against the US dollar this week. Switzerland has seen a trade recovery in recent months. Notably, luxury goods exports like Swiss watches increased by 58.9% month-on-month in June, though well below pre-COVID-19 levels.   Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020   Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been positive: Exports and imports both improved in June, especially with rebounding oil prices. The trade surplus widened from NOK2.7 billion to NOK3.2 billion. The Norwegian krone appreciated by 1.3% against the US dollar this week. Our Commodity & Energy team holds the view that global fiscal stimulus to combat COVID-19 will support global oil demand. Moreover, both OPEC and the US are likely to continue production cuts. Their bias is that oil prices will continue to grind higher, which is bullish for the Norwegian krone. Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been negative: The unemployment rate rose to 9.8% in June, up from 9% the previous month and 7.2% the same month last year. The Swedish krona surged by 2% against the US dollar this week. The latest Labor Force Survey released this week showed that the labor market in Sweden continues to deteriorate. In June, employment fell by 148,000. Average hours worked per week fell by 8.4%. That said, the Swedish krona remains cheap and will benefit from a global economic recovery.   Footnotes 1Where M = money supply, V = velocity of money, P = price level and Q = output. 2Please see Foreign Exchange Strategy Weekly Report, "EUR/USD And The Neutral Rate Of Interest", dated June 14, 2019. 3Please see Foreign Exchange Strategy Special Report, "Currencies And The Value-Vs Growth Debate", dated July 10, 2020.   Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Our intra-real estate pair trade long S&P homebuilders / short S&P REITs vaulted roughly to the 15% return mark intraday yesterday, compelling us to institute a 5% rolling stop in order to protect handsome profits since the late-May inception. Our thesis for putting on this market-neutral trade remains intact. The Fed’s ZIRP policy as far as the eye can see is perhaps the biggest catalyst for US homebuilders, especially as the one-off pandemic effects begin to wear off and people are able to take advantage of all-time low mortgage rates that recently breached 3%. In fact, the chart below suggests that the pair trade is poised for additional gains in the coming months. Bottom Line: We continue to recommend the long S&P homebuilders / short S&P REITs pair trade as more gains are in store, but from a portfolio management perspective we are instituting a 5% rolling stop in order to protect gains.