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Editor's Note:

With a second wave of Covid-19 prompting fresh lockdowns across Europe, threatening the European economic recovery we flag up a note from Heteronomics that looks at the Nordic experience in the first wave. It sets out why it is the stringency of government reaction to the pandemic that is key to the economic effect of the disease, and points to potential outperformance in the Nordic region as the second wave lockdowns hit mainland Europe hard. Pantheon Macroeconomics, meanwhile, explains why the ECB is likely to avoid the mistake it made in March and make it clear it stands ready with its now considerable “put” to stabilise nervous markets. We’ve highlighted research recently on strength of the RMB, and how that plays into the reflation trade. Recent risk off sentiment has seen the dollar surge again however, but today we thought we would take a step back from the the short-term noise and focus on the bigger picture when it comes to long-term trends in currencies. We highlight a piece from Forest for the Trees that argues that the playbook of two of the most famous currency investors of all time is set to be dusted off and put back into action. This essentially means currencies of economies that run loose fiscal and tight monetary policies (China) strengthen, while currencies of economies that run loose fiscal and loose monetary policies weaken (US). This means the dollar is set to come under further pressure against the renminbi, which will boost Chinese stocks and commodities. Also today, StoneX questions the hegemony of overpriced US assets and Cornerstone Macro sets out the likely sectoral winners and losers in the US equity market from the impending election.       
  1. Lockdowns Nordic region Heteronomics

    1. The Nordics – it’s less freezing for Covid up north; outperformers?

    Philip Rush at Heteronomics has released a note comparing the effects of Norway and Sweden’s approach to the first wave of the Covid pandemic. As he points out, it is relevant since at the outbreak of the pandemic, the governments of Sweden and Norway took different approaches to economic and social restrictions, with Norway following the general European consensus in introducing a comprehensive lockdown, while Sweden followed a less restrictive policy. Rush finds that there seems to be a tighter coincidence of recession and recovery with policy prohibitions than Covid infections. The distinction matters, he says, amid rising infection and variable restrictions across Europe. Indeed, Rush says while Norway and Sweden remain sensitive to global depression, the fact that both have indicated that they are not set to tighten the stringency of their restrictions in the second wave, means they should both suffer from a less broken supply chain and should outperform in Europe, both in the short and medium term
  2. ECB EuroArea economy Lockdowns Pantheon Macro

    2. Lagarde needs to rip up the script

    With Covid-19 now spreading uncontrollably in the major eurozone economies, and prompting them to shut everything but retailing and schools for a month, lockdown economics is back, says Claus Vistesen at Panthoen Macroeconomics. Against this backdrop, he says, the ECB will have to change its tune at its policy meeting on Thursday after striking a more confident tone on the Europe’s economic prospects last month. Vistesen says ECB president Christine Lagarde, while unlikely to unveil a new support package at this meeting, will give markets a clear hint that more stimulus is coming in an attempt to avoid the chaos prompted by the central bank’s now infamous March meeting.  Markets, he says, are already sending a distress signal ahead of the meeting – eurozone equities have been pummelled, bund yields have touched a post-lockdown low, and BTP yields have shot higher. In this sense, Vistesen says a key risk is that the ECB’s message is found wanting, prompting a further sell-off. This a simple story, in the end, he says – investors are acting on the assumption of a central bank put, which raises the obvious question; namely, what the “strike price” of such an option? If Lagarde’s performance fails to convince, says Vistesen, all markets have to do is to put the squeeze on to get the result they want. In a note earlier in the week Vistesen said while it’s difficult to quantify the shift in the EA outlook at this point, the official growth forecasts for Q4—and by extension for 2021, will come down sharply in the next few months. For instance, he notes, the Bloomberg consensus has German GDP rising by 1.4% in Q4, which almost surely is too high. The ECB will need to get in front of this.
  3. gold RMB US dollar Forest for the Trees

    3. China now running Soros/Druckenmiller strong currency playbook

    Luke Gromen at Forest for the Trees notes that two of the greatest FX traders of all time – George Soros and Stanley Druckenmiller – have long held to the playbook that loose fiscal policy and relatively tight monetary policy equate to a stronger currency, and by extension, loose fiscal policy and loose monetary policy equate to a weaker currency. That is playing out now, he says, with China doing the former and the US the latter. The CNY has been rising versus the USD, says Gromen, but given that it appears to be the policy of both nations to stay on the current track for the foreseeable future, it would seem that the CNY should continue to have a tailwind against the USD for as long as China is running loose fiscal policy and relatively tight monetary policy while the US runs loose fiscal and loose monetary policies. This should continue to be good for Chinese stocks, and it should also be good for commodities, he says. In addition, says Gromen he thinks anything that leads to a weaker USD is likely to be good for gold, gold miners and bitcoin.
  4. Asset allocation US assets valuations StoneX

    4. Is there still a bullish case for overpriced US assets?

    The positive case for US assets has eroded argues Vincent Deluard at StoneX, with the shale revolution, which kick-started the post-2014 rally in the dollar, ending in an epic hangover of bankruptcies and a collapse of US oil production, while abnormally high US real rates are long gone, and even the country’s demographic exceptionalism belongs to the past.  He says the dominance of US tech and social media platforms is the last standing part of the bullish case for US assets, but it is hard to see how this is not priced in to the market when the capitalisation of Facebook, Apple, Amazon, Netflix, Microsoft, and Google exceeds that the seven largest European countries combined.

    As Deluard explains, he is certain the dollar and U.S. assets would underperform massively if things “returned to normal” – that is if growth and inflation rebound, trade wars de-escalate, and Covid-related disruptions ebb. Indeed, he says the best argument for further strength in the US dollar and US assets is a profoundly pessimistic one, in which the world falls further into chaos, and investors flock to the safety of the dollar, US mega-caps and gold. There are two flaws in this argument, however, according to Deluard. First, he says, the worst is never certain, and for all the current pessimism over the state of the world, history has shown that it is optimists who triumph in the light of a new dawn. And second, says Deluard, the premise that it is the US that will necessarily benefit if the world descends into chaos is not a given. After all, he says, from Persia to Rome and the Mogul Empire, mighty powers rise and fall, and once seemingly invincible hegemons eventually unravel.

  5. portfolio risk US equities US presidential elections Cornerstone Macro

    5. The Trump and Biden equity portfolios; an update

    With a week to go until the election, Andy Laperriere at Cornerstone Macro has run his Trump and Biden equity portfolios. He says with all the focus on the macro implications of the election, and they are significant this year, historically the sector implications of election outcomes have been most important.  Laperriere outlines how the election portfolios have performed since he introduced them on June 11. It’s no surprise, he says, the Biden portfolio has outperformed the Trump portfolio given the polls and betting markets. The big potential winners under a Democratic sweep, infrastructure stocks and especially alternative energy stocks, have been strong performers, notes Laperriere. He adds, however, that while drug stocks have underperformed, his sense is that investors are under-pricing the risks to the healthcare sector of big drug price cuts that are likely in the event of a Democrat sweep. These portfolios are a very handy reference, where Laperriere and his team have attached weights to each sector in the portfolio, the relevant companies and ETFs in focus, and the applicable policy rationale for each sector. Cornerstone’s pre election coverage has been some of the best we’ve been reading in recent months. Click here to contact the provider directly if you’d like to access any of their recent work.