Aug 12, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙“Power concedes nothing without a demand. It never did and it never will.” - See who said it and why it matters at the bottom.

1 big thing: Investors are betting the future is priced in euros

Illustration: Aïda Amer/Axios

It's the euro's time now — at least that's how investors have been positioning recently.

What's happening: Speculators have raised their bets to the highest in nine years that the dollar will fall and increased bullish bets that the euro will rise to the highest level on record, Reuters reported citing data from the CFTC.

What it means: More money is flowing into the euro and euro-backed assets, including European stocks and bonds, as eurozone countries are seen bouncing back thanks to an $882 billion relief package passed by eurozone leaders and falling COVID-19 infection rates while the U.S. continues to struggle.

The big picture: “This is not a matter of growth this year or next year or predictions about the cycle — it’s really something more structural,” Nicolas Véron, a senior fellow at the Peterson Institute for International Economics, told Bloomberg.

  • “The budget deal changes the way financial markets look at the eurozone in a significant way."

By the numbers: The S&P 500 has outperformed the pan-European Stoxx 600 significantly, returning 3.2% year to date versus a 6.5% decline for the Stoxx, and 206% over the last 10 years vs the Stoxx's 33% gain, per FactSet.

Driving the news: The ZEW survey of economic sentiment in Germany, the eurozone's largest economy, rose to 71.5 from 59.3 the previous month. That was well above a forecast for 58.0 in a Reuters poll of economists, and the best reading since 2003, according to currency analysts.

Case in point: Analysts at the BlackRock Investment Institute announced they were raising their holdings of European equities to overweight, citing "the region’s robust public health infrastructure and a galvanized policy response."

  • "The different restart dynamics in the U.S. and Europe have also pressured the dollar, underscoring our preference for European equities and caution on U.S. stocks," they note.

Yes, but: The euro's 11% jump against the dollar since May has some in the currency market urging caution, as the last time investors packed into the euro like this in 2018 the market reversed and the dollar took flight against the continental currency.

  • Tuesday's market action may have been a preview as the greenback rose against most currencies thanks largely to a reversal of risk appetite after Senate Majority Leader Mitch McConnell said negotiations in Congress on the next U.S. stimulus package had stalled.

The bottom line: Even though the U.S. is creating much of the global turbulence with rising trade tensions and an impasse on stimulus talks, the dollar likely would strengthen from safe-haven flows if risk appetite dries up again.

2. Catch up quick

Airbnb is close to filing IPO paperwork with the SEC later this month in a move that would underscore a surprising rebound for the home-sharing giant and the IPO market. (WSJ)

Brooks Brothers is seeking approval for a sale at $325 million to apparel-licensing firm Authentic Brands and mall owner Simon Property Group. (Press release)

TikTok tracked users' data without allowing them to opt out, violating a privacy safeguard in Google’s rules of service. (WSJ)

3. PPI jumps in July but inflation remains muted
Data: U.S Bureau of Labor Statistics; Chart: Axios Visuals

U.S. producer prices rose by the most since October 2018 last month, following a 0.2% decline in June.

Details: U.S. PPI for final demand, a measurement of prices paid by businesses, increased 0.6% last month, driven by a surge in portfolio management fees and the rising cost of gasoline.

  • However, year over year through July PPI dropped 0.4% after falling 0.8% in the 12 months through June.
  • The index was growing at a yearly pace of around 2% as recently as January.

Why it matters: “Fed officials will see no reason to be on high alert for inflation pressures after today’s modest rebound in producer prices and there is little reason for them to temper their highly stimulative monetary policy,” Chris Rupkey, chief economist at MUFG, told Reuters.

4. Gold had its worst day in 7 years, but investors remain bullish
Data: FactSet; Chart: Axios Visuals

Gold fell by 2% on Tuesday with some ETFs seeing prices decline by 5% or more as investors took profits on the precious metal after a rally that has pushed gold to record highs near $2,100 per troy ounce.

  • It was the third straight session that gold fell, the longest losing streak since June, after seven days of appreciation, and the worst selloff since 2013.

What they're saying: “The scale of the upswing over the past four weeks has been excessive. ... Sentiment towards gold became positive in the extreme, with only a minority of participants sounding a note of caution,” Commerzbank analyst Carsten Fritsch wrote in a note to clients.

  • “The price rise was almost solely attributable to robust investor demand, with all other demand components playing hardly any role."

Be smart: U.S. Treasury yields also spiked on Tuesday, with yields on the benchmark 10-year note up by the most since June, reducing the attractiveness of gold, which does not pay a dividend or interest.

  • The unexpected rise in PPI also hurt gold prices, as it could imply higher U.S. interest rates in the future, analysts said.

What else: Silver retreated by nearly 5% with silver-backed ETFs down more than 10%.

The big picture: “The long-term outlook for gold and silver remains positive, however," Commerzbank's Fritsch said. "Prices are likely to begin rising again as soon as the current correction has finished.”

  • In fact, analysts expect the declines to attract more buyers looking to buy the dip, as happened in March when gold swooned with the stock market, dropping 28%, only to gain 149% between March 18 and Monday.

Yes, but: "The risk to this view is that we could now be entering a period of wider swings in the gold price, akin to 2011-12, which would be suggestive of a more mature phase in the bull cycle and consistent with the 'accelerated aging' hypothesis," Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note.

  • The rally also will be dependent on the Fed remaining aggressive in keeping rates down, the dollar continuing to fall and inflation expectations recovering, he added.
5. U.S. already feeling impacts of ending unemployment benefits

Congress' failure to renew enhanced unemployment measures at the end of July is already showing up in consumer spending patterns, holding down retail purchases and foot traffic, economists at Deutsche Bank say.

What happened: The reduced spending aligns with the expiration of the Federal Pandemic Unemployment Compensation benefits, which provided an additional $600 per week to qualifying unemployed individuals.

  • By mid-June spending by lower-income households had normalized, outpacing spending recoveries for middle- and higher-income consumers thanks to the unemployment benefits, the economists noted.
  • But by the end of the month, consumer spending fell more for lower-income households than others, "no doubt impacted by the sharp decline in unemployment benefits."

Why it matters: "The evaporation of these benefits highlights near-term downside risks to consumer spending, particularly for lower-income households, which have been a critical engine of the recovery despite being disproportionately more likely to lose a job during the pandemic — a testament to the effectiveness of the income supplement."

Major key: Google mobility data indicate that since the end of July foot traffic around retail has declined by more in states that were more likely to be impacted negatively by the expiration of unemployment benefits.

Between the lines: Despite President Trump's executive memo extending $400 a week (now looking more like $300/week) in unemployment benefits, "legal, administrative and fiscal uncertainty remains."

A recent study published by the National Bureau of Economic Research found that eliminating the enhanced unemployment benefits would lead to a 44% decline in local spending.

  • Cutting it to $200 would mean a 28% decline in spending.
  • Reducing to $400 would cut spending by 12%.
Dion Rabouin

Thanks for reading!

Quote: “Power concedes nothing without a demand. It never did and it never will.”

Why it matters: On Aug. 12, 1922, the Washington, D.C., home of abolitionist Frederick Douglass known as Cedar Hill became a dedicated national museum.