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Editor's Note:

Today’s Macro Briefing focuses on the prospects for the US economy and markets as the US authorities continue to struggle to get a hold on the spread of coronavirus pandemic and the notion of the Federal Reserve keeping its foot on the monetary accelerator becomes further entrenched. Pantheon Macroeconomics outlines why a surge in infections in the South and West could endanger the US recovery, while ECR research explains why the Trump administration’s insistence on reopening the economy is likely to backfire and weigh on the dollar as the Fed is forced to attempt to prop up activity and support asset prices. Meanwhile, Macro Thoughts sets out why the Fed may struggle to support US equities amid weak consumer activity and potential accusations of political interference ahead of the US presidential elections, and Pennock Idea Hub examines where investors can find returns amid warnings of a lost decade for US equity investors. Elsewhere, digital currencies are in the spotlight as Pantera Capital and JP Morgan explain how they appear to have passed the stress test caused by the coronavirus pandemic and global central banks’ retreat to the printing presses.     
  1. alternative assets bitcoin Cryptocurrencies JPMorgan Pantera Capital

    1. A shiny Bitcoin

    While many investors may not currently have a mandate to own digital currencies, there is increased focus on the sector- and particularly bitcoin – as the prospect of the unprecedented money printing that it was originally designed to replace becomes entrenched in the global economy.  As Pantera Capital’s Dan Pantera notes, that tsunami of money will have a large impact on many things, and it seems inevitable that it will push up the price things like bitcoin, of which there is a fixed quantity. After all, he says, if there are trillions more paper dollars, the law of supply and demand implies much more paper money to buy the same amount of cryptocurrency. Pantera has been beating the drum about bitcoin benefitting from continued monetary expansion, and he says that thesis has played out well, with bitcoin is up 34% this year relative to most other asset classes being down. Indeed, he believes markets are at an inflection point where excess liquidity pouring into the system by the Federal Reserve will find its way to fixed-supply assets like bitcoin and other cryptocurrencies, some of which are surging even more than bitcoin.

    The comments come as observers assess the performance of digital currencies like bitcoin more generally amid the turmoil sparked by the coronavirus pandemic. JP Morgan, (Cryptocurrency takes its first stress test (June 11)), notes the past few months saw the first real stress test for the cryptocurrency market, and the results were mostly positive, pointing to its potential longevity as an asset class. Bitcoin, says the bank, rarely deviated from the cost of production and outperformed other more traditional asset classes on a volatility-adjusted basis. Somewhat surprisingly, adds JP Morgan, liquidity on major bitcoin exchanges was more resilient in March than traditional macro asset classes like FX, Treasuries, gold and equities.

  2. equity returns tactical asset allocation Pennock Idea Hub

    2. A lost decade – Biden’s pyrrhic victory?

    Should Joe Biden win the White House in the next election, he may only win an economic pyrrhic victory, as investors are likely to sour at the prospect of a “lost decade” for equity returns, warns Cam Hui at Pennock Idea Hub. He points to analysis that has recently emerged forecasting a bleak decade for equities, and US equities in particular, with firms such as Bridgewater Associates warning of a possible “lost decade” for US stocks owing to a retreat in globalisation. Hui believes investors are facing a low return setting over the next decade, however, as he explains, there are a number of pockets of opportunity for investors. Gold, value stocks, selected cheap foreign markets and the use of tactical asset allocation are all ways of enhancing returns in a difficult investing environment, he says.
  3. Fed stimulus US Elections US equities Macro Thoughts

    3. US Equities; Home, home with the range

    Several banks have started to revise up their end of year equity expectations, with some suggesting the consumer is cash rich, says Keith Grindlay at Macro Thoughts. He, however, maintains his expectation for the range 3200 to 3000 to hold in the S&P 500 for a while, but warns the risks to the downside have not gone away. Grindlay maintains that it is the demand side that drives the economy, not the supply side, and that the US consumer remains under pressure. Equity markets have continued to rally, he says, in the expectation that the Fed will always be there to support the market, but expectations for an economic recovery are optimistic and risk disappointment, which will have significant consequences for equities. This is an issue the Federal Reserve under Powell has created for itself, and a potential bubble that may yet turn into high market volatility, adds Grindlay. Indeed, he says with an election due and having put so much into the economy, any volatility that creates another sell off in equities will become a problem for Powell: can he be seen to be supporting equities again if polls show Trump could lose the election and continue to look impartial?
  4. currencies Fed policy ECR Research

    4. The US is preparing for a spell of dollar weakness

    Edward Markus at ECR Research believes until the November elections, the Republicans and Trump are likely to continue to pursue policies that may be popular among their loyal supporters, but which will slow down the US economy as a whole. He notes the easing of lockdowns may appeal to Trump’s voter base, and appear to be helping to achieve a return to normality, but actually achieves the opposite, ramping up infections and suppressing consumption as the savings of individuals and companies increase. As a result, the Federal Reserve will have to compensate for this by continuing to hit the monetary accelerator hard, says Markus, probably even harder than the ECB – as European countries are increasingly moving towards joint fiscal stimulus for the economy and have been more successful at bringing the coronavirus under control. That is why he believes, notwithstanding bouts of risk aversion that could boost the dollar periodically, EURUSD is likely to exceed $1.20 in the coming quarters.
  5. Covid reopening US economy Pantheon Macro

    5. The third-quarter rebound is at risk

    The third-quarter rebound in the US is at risk as the South and West re-impose restrictions in the face of a renewed surge in coronavirus infections, says Ian Shepherdson at Pantheon Macroeconomics. He notes the economic recovery story has been concentrated in the South and West, because the populous states of the Northeast and Midwest were hit hardest by the initial wave of Covid-19 and are only now gingerly coming out of lockdown. Over the next few weeks, Shepherdson says, the numbers from these states—restaurant diners, small business employment, and mobility data—will all improve. They’ll probably rise fast enough to offset the inevitable further softening in the South and West, he says, so the national indicators will rise, but they will rise much less quickly than previously expected. In short, says Shepherdson, the third-quarter GDP growth expected by most forecasters—the Bloomberg consensus forecast is 21%, after the expected 37% annualised drop in the second quarter—is now at serious risk. He notes it will take a month or so, at least, before the changes in behaviour and new restrictions induce a sustained and clear downshift in cases and hospitalisations, allowing another attempt at reopening in the South. This means that the first month of the third quarter will be very weak, says Shepherdson, and while he isn’t ready to pull down his 30% estimate for a third-quarter just yet, the balance of risks is moving to the downside.