Economy

Highlights Duration: While it’s possible that we are close to the US economic trough, we don’t see any immediate upside in Treasury yields. Investors should keep portfolio duration at benchmark and await signs of recovery in our preferred global growth indicators. Spread Product: Investors should buy spread products that offer attractive spreads relative to history and that benefit from Fed support. We favor: Aaa non-agency CMBS, Agency CMBS, Aaa ABS, municipal bonds and investment grade corporate bonds. High-Yield: We recommend an overweight allocation to Ba-rated high-yield corporates and an underweight allocation to high-yield bonds rated B and lower. Ba-rated bonds will benefit from Fed support and value in the B-rated and below credit tiers does not adequately compensate for likely default losses. Feature Chart 1Fed Actions Spur Rally Even though the economy remains closed and most of us are still confined to our homes, the mood in financial markets has shifted during the past few weeks. Risk assets are rallying as investors react to a cresting in the number of new COVID-19 cases and an unprecedented fiscal and monetary response. Since the Fed announced that it would step into the corporate bond market on March 23, equities have outpaced Treasuries by 28% and high-yield bonds have beaten the Treasury benchmark by 15% (Chart 1). Treasury securities initially rallied after the landmark Fed announcement but have only kept pace with cash during the past two weeks (Chart 1, bottom panel). This reversal in markets begs the question: Is the bottom already in? In this week’s report we ask that question about several different US bond sectors. Too Early To Call The Bottom In Treasury Yields At least in the Treasury market, we think it is premature to call the bottom in yields. Chart 2The Depths Of The Downturn In prior reports we outlined a checklist to call the trough in Treasury yields.1 Two of the items on that checklist were: a severe deterioration in the US economic data and signs of economic recovery in the rest of the world, particularly in those places where the pandemic struck first – like China. We are certainly now seeing the bad US economic data. The Economic Surprise Index is just off its all-time low and a composite of 10 high-frequency economic indicators compiled by the New York Federal Reserve is at its lowest point since the series began in 2008 (Chart 2). Similarly, weekly initial jobless claims set a record three weeks ago. Though they remain extremely elevated, new claims have declined in each of the past two weeks (Chart 2, bottom panel). All this at least raises the possibility that we are close to the trough in US economic growth. However, our second criterion of improving demand outside the US, particularly in China, has not been met. This is crucial because bond investors will need to see that there is light at the end of the tunnel before concluding that US economic activity will trend higher. China’s Manufacturing PMI bounced to just above 50 in March, suggesting that only a small majority of firms experienced better economic conditions in March compared to February. China’s credit impulse is advancing, demonstrating that policymakers are pumping a large amount of stimulus into the economy. But high-frequency growth barometers – like the CRB Raw Industrials index, the performance of cyclical versus defensive equity sectors and the trend in Emerging Market currencies – all remain downbeat (Chart 3). Bond investors will need to see improving demand outside the US before concluding that US economic activity will trend higher. For Treasury yields, the broad CRB Raw Industrials commodity benchmark is particularly important. This is because the ratio between the CRB index and the price of gold closely tracks the 10-year Treasury yield (Chart 4). In a typical economic downturn, we first see Treasury yields and the CRB index fall together as global demand weakens. Then, monetary policy responds by turning more accommodative, leading to a rebound in the price of gold as investors start to reckon with the potential long-run inflationary impact of monetary stimulus. Eventually, bond yields will bottom. But this will only occur once the stimulus seeps through to the real economy and gains in the CRB index start to outpace gains in gold. Chart 3No Global Growth Recovery Yet Chart 4Track The CRB/Gold Ratio The dynamic described above means that we should expect Treasury yields to lag risk assets as the market bottoms. In other words, we will see a sustained rebound in equity prices and corporate bond excess returns before Treasury yields move meaningfully higher. This is especially true in this cycle because the Fed has indicated that it will be slow to shift away from its accommodative policy stance. Bottom Line: While it’s possible that we are close to the US economic trough, we don’t see any immediate upside in Treasury yields. Investors should keep portfolio duration at benchmark and await signs of recovery in our preferred global growth indicators. To hedge against the risk of higher Treasury yields without making a large duration bet, investors should implement duration-neutral curve steepeners. We recommend going long the 5-year bullet and short the duration-matched 2/10 barbell.2 Is The Bottom In For Investment Grade Spread Product Excess Returns? We hesitate to call the bottom in overall spread product returns versus Treasuries. However, we do see many buying opportunities in specific US fixed income sectors. In deciding which sectors to own, we advise investors to search for sectors that: (A)  Have attractive spreads and (B)  Benefit from one or more of the Fed’s recently announced programs We described each of the Fed’s different lending facilities in last week’s Special Report, and will not repeat that exercise this week.3 Instead, we run through a list of sectors where we think spreads have already peaked and that bond investors should own today. Aaa CMBS Aaa-rated CMBS, both non-agency and agency-backed, meet our two criteria of offering attractive spreads and benefiting from Fed support (Chart 5). The Aaa non-agency CMBS index spread is 119 bps wider than at the end of 2019, and the securities can be used as collateral under the Fed’s Term Asset-Backed Loan Facility (TALF). Specifically, bondholders can borrow from TALF against their Aaa non-agency CMBS collateral at a rate of OIS + 125 bps (Chart 5, panel 2). TALF will also impose a haircut of around 15% on CMBS collateral. Chart 5Buy Aaa CMBS Agency-backed CMBS are even more attractive on a risk-adjusted basis. The Agency CMBS index spread is 50 bps above its end-2019 level and the Fed is directly purchasing Agency CMBS as part of its ongoing mortgage-backed securities purchases. As of April 15, the Fed had purchased $5.7 billion of Agency CMBS since it announced CMBS purchases on March 23. The outstanding par value of the Bloomberg Barclays Agency CMBS index is about $204 billion. If the Fed’s current pace of purchases continues for one year, it will own just under half of the index’s par value. Aaa ABS Though the spread is not quite as attractive as for Aaa non-agency CMBS, the spread on Aaa-rated consumer ABS is 115 bps wider since the end of 2019 (Chart 6). As with CMBS, this sector also benefits from TALF with an interest rate of OIS + 125 bps, and an even smaller haircut. Chart 6Buy Aaa Consumer ABS & Munis Municipal Bonds We also like the opportunity in municipal bonds. Spreads between Aaa-rated municipal bond yields and Treasuries have come down off their recent all-time highs but remain attractive compared to historical levels (Chart 6, bottom panel). The Fed’s Municipal Liquidity Facility (MLF) offers direct 2-year loans to state & local governments. This will provide a back-stop for municipal debt with a maturity of 2 years or less but will also help municipalities meet interest payments on longer-maturity bonds when they are due. Aaa-rated CMBS, both non-agency and agency-backed, meet our two criteria of offering attractive spreads and benefit­ing from Fed support. We would therefore advise investors to buy municipal bonds at both the short and long ends of the curve. We also do not rule out further Fed measures to support the municipal bond market in the coming weeks, possibly even secondary market bond purchases. The amount of Fed support for state & local governments so far is much less than what is being done for the corporate sector. There is also no convincing moral hazard argument against scaling-up support for investment grade rated munis, especially when the Fed is already supporting some parts of the high-yield corporate market. Investment Grade Corporates As mentioned above, the Fed is providing an exceptional amount of policy support to the investment grade corporate bond market, mainly through three facilities: The Secondary Market Corporate Credit Facility (SMCCF) that will purchase corporate bonds and ETFs in the secondary market. The Primary Market Corporate Credit Facility (PMCCF) that will purchase new bond issues in the primary market. The Main Street New and Expanded Lending Facilities (MSNLF & MSELF) that will purchase corporate loans from banks, removing them from bank balance sheets. All three of these facilities support the investment grade corporate bond market, and investment grade corporate spreads remain elevated compared to history across all credit tiers (Chart 7). Chart 7Buy Investment Grade Corporates Bottom Line: Investors should buy spread products that offer attractive spreads relative to history and that benefit from Fed support. We favor: Aaa non-agency CMBS, Agency CMBS, Aaa ABS, municipal bonds and investment grade corporate bonds. Have High-Yield Spreads Already Peaked? In the high-yield market we follow the same rules we applied in the previous section. We want to buy sectors that have attractive spreads and that benefit from Fed support. Within high-yield, the Ba credit tier meets these criteria as it offers an elevated spread and loans to Ba-rated issuers are eligible under the MSNLF and MSELF. The SMCCF will also purchase some high-yield ETFs and both the SMCCF and PMCCF will purchase securities that were recently downgraded to Ba from Baa. However, for the most part, securities rated B and below will not benefit from the Fed’s new facilities and thus will trade purely on fundamentals.4 This demarcation between securities rated Ba and above and those rated B and below is already showing up in excess returns. Since the Fed first announced corporate bond purchases on March 23, Ba-rated junk bonds have outperformed Treasuries by 16.88%, beating B-rated bonds (13.84%), Caa-rated bonds (9.53%) and the lowest Ca/C-rated credit tier (6.85%) (Table 1). Table 1Corporate Bond Performance Since Announcement Of Fed Purchases Assessing High-Yield Fundamentals Even without Fed support, lower-tier junk bonds are still worth buying if spreads provide adequate compensation for expected defaults. We assessed the likely magnitude of the looming default cycle in a recent Special Report.5 One main conclusion from that report is that, due to elevated corporate sector leverage, the recovery rate on defaulted debt will likely be low during the next 12 months – on the order of 20-25%. Second, based on the expected magnitude and duration of the current economic shock, we expect a significant surge in the speculative grade corporate default rate during the next 12 months, likely hitting a range of 9%-13%. Even without Fed support, lower-tier junk bonds are still worth buying if spreads provide adequate compensation for expected defaults.  With these default loss assumptions in hand, we can see what sort of buffer is priced into different high-yield credit tiers. Charts 8-10 show calendar-year excess returns for Ba, B and Caa-C high-yield credit tiers on the vertical axes. On the horizontal axes, the charts show the index spread at the start of the 12-month investment horizon less realized default losses over the course of the year.6 Chart 8Ba Default-Adjusted Spread Chart 9B Default-Adjusted Spread Chart 10Caa-C Default-Adjusted Spread We first observe that a Default-Adjusted Spread below 200 bps usually coincides with negative excess returns for all three credit tiers. In fact, for the Caa-C tier, we’d like to see a Default-Adjusted Spread above 500 bps before going long. Second, the green diamonds in all three charts identify likely outcomes for the next 12 months in three different default loss scenarios. The “Mild Scenario” is defined as a 6% speculative grade default rate and 25% recovery rate. The “Moderate Scenario” is defined as a 9% speculative grade default rate and 25% recovery rate. The “Severe Scenario” is defined as a 12% default rate and 25% recovery rate.7 Based on those choices, we’d place our base case default loss assumptions for the next 12 months somewhere between the Moderate and Severe scenarios. Charts 8-10 clearly show that, while Ba-rated issuers might still perform decently, the B-rated and below credit tiers are not priced at all for our base case default outlook. Note that this analysis does not consider Fed support in any way. Factoring that in, Ba-rated bonds look even better compared to bonds rated B and below. Bottom Line: We recommend an overweight allocation to Ba-rated high-yield corporates and an underweight allocation to high-yield bonds rated B and lower. Ba-rated bonds will benefit from Fed support and value in the B-rated and below credit tiers does not adequately compensate for likely default losses.    Ryan Swift US Bond Strategist rswift@bcaresearch.com Footnotes 1 Please see US Bond Strategy Weekly Report, “When And Where Will Bond Yields Trough?”, dated March 10, 2020, available at usbs.bcaresearch.com 2 For more details on why we recommend this yield curve positioning please see US Bond Strategy Weekly Report, “Life At The Zero Bound”, dated March 24, 2020, available at usbs.bcaresearch.com 3 Please see US Investment Strategy/US Bond Strategy Special Report, “Alphabet Soup: A Summary Of The Fed’s Anti-Virus Measures”, dated April 14, 2020, available at usbs.bcaresearch.com 4 As we noted in last week’s Special Report, some B-rated issuers will benefit from the MSELF. But this support is minor compared to what is being offered to securities rated Ba and higher. 5 Please see US Bond Strategy/Global Fixed Income Strategy Special Report, “Trading The US Corporate Bond Market In A Time Of Crisis”, dated March 31, 2020, available at usbs.bcaresearch.com 6  We use Ba and Caa-C default losses for those credit tiers. For B-rated bonds, we found that overall speculative grade default losses work slightly better than default losses for the B credit tier specifically. 7 We use historical correlations to translate overall speculative grade default rate assumptions into default rate assumptions for the Ba and Caa-C credit tiers. Fixed Income Sector Performance Recommended Portfolio Specification

Highlights Portfolio Strategy Our conservative dividend growth assumptions especially for the next three years – largely mimicking the GFC experience – result in an SPX 3,000 fair value target. Relative performance already reflects the jump in demand for packaged foods. A firm US dollar and an ongoing profit margin squeeze at a time when relative valuations have returned to the historical mean compel us to downgrade the S&P packaged foods index to neutral. An upward trending demand profile, a fortress of a balance sheet, exemplary recession resilience, and sustained M&A activity, all warrant an overweight stance in the S&P software index. Recent Changes Trim the S&P packaged foods index to neutral today, which pushes the S&P consumer staples sector to a benchmark allocation. Boost the S&P software index to overweight today, which lifts the S&P tech sector to a benchmark allocation. Table 1 Feature The SPX jumped to a five-week high last week, on the back of news that the economy will gradually reopen next month. In other news, GILD’s remdesivir drug showed some positive early signs in fighting off the coronavirus, sparking an impressive late-week rally in the SPX. From a macro perspective, flush monetary liquidity and extremely easy fiscal policy remain the dominant market forces. While we remain confident that equities will be higher on a 9-12 month cyclical time horizon, we believe that the easy money since the March 23 lows has already been made and a consolidation phase now looms. Thus, monetizing some of these gains would make sense at the current juncture. Keep in mind that the SPX, junk spreads and the CBOE’s put/call ratio have returned to their respective means since 2018 (horizontal lines denote the historical averages, Chart 1). Tack on the stiff resistance that the S&P 500 will face near the 50-day and 100-week moving averages, and a lateral move is likely in the coming weeks. Meanwhile, in our seminal report “SPX 3,000?” on July 10, 2017 we introduced our SPX dividend discount model (DDM) when we first came up with the SPX 3,000 target.1 It is now custom to update our DDM every April when the previous year’s annual S&P 500 dividend payment is finalized from the Standard & Poor’s. Chart 1Consolidation Mode Chart 2Dividends Rule As a reminder, we have been and remain very conservative in our DDM assumptions. Again this year we assume that no buybacks will occur, a long held assumption of ours, i.e. we pencil in a steady divisor in the coming five-year time frame. 2025 is our terminal year when dividend growth settles at 6.6%, 60bps below the long-term average (bottom panel, Chart 2). Our 8.2% discount rate mirrors the corporate junk bond yield historical average. This year we use two different dividend growth approaches: our own estimates and alternatively the S&P 500 dividend futures derived growth. In the spirit of conservatism, we pick the lowest point hit in early April across the different dividend futures expirations. Tables 2 & 3 summarize the results. In the dividend futures derived approach, SPX fair value is close to 2,110. Granted, such dividend contractions for two years running (33% in 2020 and 14% in 2021, Table 2) are extreme and highly unlikely. Moreover, dividend futures have since rebounded violently. However, we stick with them to derive our worst case SPX value. Table 2SPX Dividend Discount Model: Using S&P Dividend Futures Growth Assumptions Our own dividend growth estimates result in an SPX 3,000 fair value target (Table 3). While our assumptions are not as dire as the nadir in dividend futures, they are slightly more conservative than the GFC experience. As a reminder, in the aftermath of the GFC dividends contracted by 20% in 2009 and then recovered rising by 1% and 16% in 2010 and 2011, respectively (please click here if you would like to receive our DDM and insert your own assumptions). Table 3SPX Dividend Discount Model: Using USES Dividend Growth Assumptions Building up on this analysis, we want to identify sectors that are at risk of a dividend cut, and thus pose the greatest threat to our SPX dividend projections. Table 4 shows the 2019 sectorial dividends, profits, and the payout ratio along with indebtedness. While during the Great Recession financials cut their handsome dividends, the current recession is not a financial crisis and we doubt the financials sector will cut their dividends, at least not as aggressively as in the GFC (Table 5). Table 4S&P 500 GICS1 Sector Dividend Analysis Table 5The GFC S&P 500 GICS1 Sector Dividend Experience Energy is a clear standout, but neither XOM nor CVX will forego their dividend aristocrat status (minimum 25 consecutive years of rising dividends) and chop their dividends. In other words, these Oil Majors will do everything in their power including raising debt to ever so modestly increase their dividends and maintain their aristocrat status. Thus, $24bn of energy sector related dividends are safe or 55% of the overall energy sector’s dividend. Keep in mind that the energy sector increased their dividends in the GFC (Tables 4 & 5). Industrials (GE is no longer a big dividend payer), materials, real estate and select consumer discretionary are sore spots, but not large enough to undermine the SPX (Table 4). Tech, health care and consumer staples are in excellent shape and judging by JNJ’s and COST’s recent dividend hikes, these sectors that enjoy mostly pristine balance sheets may even increase their payouts as they did during the GFC (Tables 4 & 5). While utilities and telecom services are debt saddled, their defensive stature and stable cash flow streams along with their history of steady dividend payments also do not pose a real threat to the SPX’s dividend (Tables 4 & 5). This leaves financials as the key sector to monitor for a possible large inflicted wound to the SPX dividend. In the most adverse scenario where the Fed instructs banks to eliminate their dividends, as the BoE and the ECB recently did in Europe, then the SPX dividend will contract, but only by 15%, ceteris paribus. This is because last year the tech sector had the highest dividend weight in the SPX and also because the financials sector’s dividend weight has fallen from 30% in 2007 to 15% in 2019 (Tables 4 & 5). Netting it all out, we are comfortable with our dividend growth assumptions especially for the next three years – largely mimicking the GFC experience – and resulting in an SPX 3,000 fair value target. The path of least resistance for the SPX remains higher on a 9-12 month cyclical time horizon. However, given that the easy SPX gains from the March 23, 2020 lows – when we turned cyclically bullish2 – have been made, opportunistic/nimble investors could monetize at least a part of these massive one-month returns. As aforementioned the SPX may face resistance near the 50-day moving average where it attempts to consolidate its recent gains. This week we are downgrading a defensive group to neutral and boosting a deep cyclical group to an above benchmark allocation. Turning Stale Following up from last week’s report, we heed the message from our research to be wary of staples stocks at the depth of the recession and downgrade the S&P packaged foods index to neutral. This move also pushes the S&P consumer staples sector down to a benchmark allocation from previously overweight. While this defensive index had been severely bruised from the accounting scandal at Kraft/Heinz, it has really flexed its safe haven muscles year-to-date. We use this opportunity to trim exposure down to neutral as we deem that this relative advance has run out of steam, despite the once in a lifetime jump in a number of key demand indicators. Chart 3 shows that food & beverage store retail sales now garner 17% of total retail sales a percentage last hit in the early 1990s. Impressively, not only did industry sales rise in absolute terms, but also overall retail sales suffered a severe setback accentuating last month’s spike. Similarly, food output hit a high mark last month, outpacing overall industrial production that came to a standstill. Food products resource utilization also soared, outpacing overall capacity utilization by 10% (bottom panel, Chart 3). As a result, relative share price momentum came close to accelerating by triple digits on a short-term rate of change basis (Chart 4). While such euphoria is warranted, we reckon that most if not all the good news is already reflected in prices, especially given the early signs of a possible reopening of the US economy some time next month. Importantly, sell side analyst optimism has climbed to a similar height observed in late-2015/early-2016 when industry 12-month forward EPS were slated to outshine the broad market by over 10% (bottom panel, Chart 4). Chart 3Demand Boost… Chart 4…Is Already Baked In Worrisomely, despite the rising demand profile, operating margins have been drifting lower over the past decade and a further profit margin squeeze remains a high probability outcome (Chart 5). Finally, on the food export front, the rising US dollar is warning that volumes will remain in check in coming quarters (greenback shown inverted, middle panel, Chart 6). All of this is reflected in valuations that have returned to the 25-year mean with packaged food manufacturers now trading at a 9% forward P/E premium to the broad market (bottom panel, Chart 6). Chart 5Margin Trouble Chart 6Past Expiry Date In sum, relative performance already reflects the jump in demand for packaged foods. A firm US dollar and an ongoing profit margin squeeze at a time when relative valuations have returned to the historical mean compel us to downgrade the S&P packaged foods index to neutral. Bottom Line: Trim the S&P packaged foods index to neutral, today for a loss of 20% since inception. This downgrade also pushes the S&P consumer staples sector to neutral for a loss of 11% since inception. The ticker symbols for the stocks in this index are: BLBG: S5PACK – MDLZ, SJM, KHC, CPB, MKC, CAG, TSN, GIS, HSY, HRL, K, LW. Boost Software To Overweight We recently monetized over 50% relative gains in our overweight in the S&P software index, but today we are compelled to lift this heavyweight tech sub-index back to an overweight stance. One key reason for our renewed bullishness is that for the second time in the past 15 months, software stocks managed to eke out relative gains when the broad market fell peak-to-trough 20% and 35% in late-2018 and in Q1/2020, respectively (Chart 7). This resilience on the way down confirms both the defensive stature of this services tech subgroup and simultaneously our long held belief that when growth is scarce investors will flock to secular growth stocks. Chart 7Recession Proof As a result and following up from our recent data processing upgrade, another defensive services tech group, we are compelled to augment exposure to the S&P software index to overweight. Last week we showed that the tech sector (along with financials and consumer discretionary) best the broad market from the recessionary troughs onward, signaling that the key software sub group will likely lead the recovery.3 Software investment is on a multi decade upward trajectory and is slated to rise further in coming quarters as overall spending takes the back seat, but defensive software capex remains resilient (Chart 8). Not only do corporate executives upgrade software in downturns as these upgrades yield near instantaneous return on investment and are immediately productivity enhancing, but also the push to cloud-based services will only accelerate during the ongoing recession (bottom panel, Chart 8). Tack on that the global coronavirus social distancing measures are also boosting demand for remote working services specifically, and software sales will continue to grind higher (Chart 9). Chart 8Capex Market Share Gains Chart 9Rising Demand Buoys Sales Meanwhile, industry M&A remains robust and both the number of deals are still rising at a brisk rate and the premia paid remain near historically high levels (Chart 10). Contrary to a slew of corporations that have announced dividend cuts and equity buyback suspensions, pristine software balance sheets underscore that shareholder friendly activities will remain in place, if not accelerate, during the current recession (bottom panel, Chart 10). Chart 10What’s Not To Like? Chart 11Model Says Buy Our macro-based software EPS growth model does an excellent job in capturing all these moving forces and it is signaling that industry profits will continue to expand at a healthy pace for the rest of the year, in marked contrast to the broad market’s expected profit contraction (Chart 11). Adding it all up, an upward trending demand profile, a fortress of a balance sheet, exemplary recession resilience, and sustained M&A activity, all bode well for an earnings-led outperformance phase in the S&P software index. Bottom Line: Boost the S&P software index to overweight, today. This upgrade also lifts the S&P tech sector to neutral for a loss of 5% since inception. The ticker symbols for the stocks in this index are: BLBG: S5SOFT – MSFT, ADBE, CRM, ORCL, INTU, NOW, ADSK, ANSS, SNPS, CDNS, FTNT, PAYC, CTXS, NLOK.   Anastasios Avgeriou US Equity Strategist anastasios@bcaresearch.com       Footnotes 1     Please see BCA US Equity Strategy Weekly Report, “SPX 3,000?” dated July 10, 2017, available at uses.bcaresearch.com. 2     Please see BCA US Equity Strategy Weekly Report, ““The Darkest Hour Is Just Before The Dawn”” dated March 23, 2020, available at uses.bcaresearch.com. 3    Please see BCA US Equity Strategy Weekly Report, “Fight Central Banks At Your Own Peril” dated April 14, 2020, available at uses.bcaresearch.com.     Current Recommendations Current Trades Strategic (10-Year) Trade Recommendations Size And Style Views June 3, 2019 Stay neutral cyclicals over defensives (downgrade alert)  January 22, 2018 Favor value over growth May 10, 2018 Favor large over small caps (Stop 10%) June 11, 2018 Long the BCA Millennial basket  The ticker symbols are: (AAPL, AMZN, UBER, HD, LEN, MSFT, NFLX, SPOT, TSLA, V).

Highlights Banks have an unmatched perspective on the entire economy, … : BCA began by tracking money flows through the banking system to gain advance notice of the direction of markets and the economy. … so we review the five largest banks’ earnings calls every quarter to augment our standard macro analysis: We’re looking for insight into borrower performance, lender willingness, consumer behavior, business sentiment and the condition of the banking system. The biggest banks are bearish on the economic outlook, but bullish on their ability to get through it, … : No management teams are looking for a V-bottom, and their expectations about the duration of the downturn sound a good bit more pessimistic than most investors’. They all expressed confidence in their institutions’ preparedness, however, citing sizable capital buffers and high-quality loan portfolios. … and we agree with their self-assessment: Analysts were skeptical that the banks have adequately reserved for coming loan losses, but we take the more optimistic view that their earnings power will allow them to absorb repeated iterations of reserving while barely scuffing book value. Follow The Money The big banks reported their first quarter earnings last week, and equity investors were decidedly unimpressed, knocking the stocks down 15-19% through Thursday’s close while the S&P 500 was flat. We listen to the calls to hear banks’ observations about households’ and businesses’ financial activity and glean some insight into where lending might be headed. This time we also wanted to use what we heard to inform our investment view on their stocks. We have long been of the view that post-GFC regulatory reforms left the SIFI banks overcapitalized. Even staring down the barrel of the current downturn, it was our sense that the SIFIs had ample capital buffers to withstand a severely adverse scenario, and the sharp de-rating they’ve been subjected to was excessive. With the potential range of credit outcomes so wide, however, it was hard to assess how much their per-share book values might fall, and so we couldn’t state with conviction whether or not the SIFIs’ stocks were as cheap as they appeared to the naked eye. The uncertainty remains, but we heard enough on the calls to conclude that book values are likely to remain resilient. 4Q19 Big Bank Beige Book As a group, the banks offered a pretty grim take on the economy. JPMorgan Chase built its in-house economists’ late-March forecast of a 25% decline in 2Q GDP and an unemployment rate above 10% into its model for calculating its 1Q loan-loss reserve, only to have them revise their forecasts lower, to -40% and 20%, respectively, after the bank closed its books. The rest of the banks, which offered directional GDP and unemployment views instead of point forecasts, uniformly called for weakness well into 2021. The banks were downbeat on the economy, but confident in their ability to manage through it, and not a single one has any intention of cutting its dividend. On the bright side, every bank cited its sizable capital buffer when arguing that it is in a better position than it was in 2008. The banks’ contention that the mix and quality of their loan books makes them safer than they were then didn’t seem to get much traction. The mortgages they hold today were much more carefully underwritten than the ones they held in 2008, but the quality of the banks’ overall loan books won’t be known until the recession has run its course. Many business borrowers are weaker credits that they were when their loans were extended, though the record-low growth in bank lending in the expansion just concluded suggests that the banks committed fewer excesses in this cycle than they normally do (Chart 1). Chart 1An Expansion Without Bank Lending Excesses Businesses drew down their credit lines at a frenzied pace over the last two weeks of March (Chart 2), a sure sign that they feared that liquidity would be in short supply. Since many of the banks saw the funds return to them as deposits (Chart 3), it seems that the draws were precautionary, rather than emergency, measures. It is entirely possible that the lines will be paid down once businesses replace them with forgivable 1% loans from the Paycheck Protection Program (PPP) funded by the SBA,1 though legislative attempts to replenish the PPP's rapidly consumed initial resources are currently in limbo. Chart 2Corporate Borrowers Drew Down Their Credit Lines With Stunning Speed, ... Chart 3... Only To Put It Back In The Bank Every bank asserted that it had the capacity to continue to pay its dividend, and pledged to do so as long as conditions didn’t deteriorate dramatically. Operationally, the banks were largely able to perform their standard functions without interruption, despite having the majority of their employees working from home. Successful remote operations bode well for future productivity and profitability as they may herald a future in which banks are able to reduce their costly branch footprints. They also suggest that their ongoing IT investments are paying dividends. A Sudden Stop In Household Spending (Chart 4) And Borrowing Chart 4Sudden Stop [I]n March, we saw a rapid decline in spend initially in travel and entertainment, which then spread to restaurants and retail as social distancing protocols were implemented more broadly. … [W]e did see an initial boost to supermarkets, wholesale clubs and discount stores as people stocked up on provisions, but even that is now starting to normalize. (Piepszak, JPM CFO) [Credit card] spend in aggregate was down 13% in the month of March, year-over-year, and we are seeing trends like that continue here in April. (Piepszak, JPM) Consumer spend is down over 25% year-over-year this past week with food and drug increasing and other spend down significantly. (Scharf, WFC CEO) March 2020 [card] volumes declined approximately 15% from March 2019. (Shrewsberry, WFC CFO) [Our customers’] … overall spending … seems to have stabilized in the last few weeks. During mid-April, we’re seeing [weekly] spending running about a low $50 billion average level compared to $60 billion … before the crisis. (Moynihan, BAC CEO) [T]he last week of March, the card spend activity just broadly for us was down about 30%. … [W]e would expect there to be continued pressure on purchase sale volumes through most of the second quarter. (Mason, C CFO) A Sharp Rise In Credit Line Utilization, … C&I loans were up 26% [year-on-year] as revolver utilization increased to 44%, which is an all-time high. … [E]arly here in the second quarter, we have seen a pause on revolver draws but … we are assuming … that we will see [them] continue in the second quarter, albeit at lower levels than the first quarter. (Piepszak, JPM) [The draws] really have flattened out, and they have been negligible for the last several days, more than a week. And so they probably peaked at the end of the third week of March, and then came right back down. … It’s worth noting that the high rate of [utilization] growth … has backed off since credit markets have reopened. (Shrewsberry, WFC) The draw activity was pretty normal through the first week of March, but ramped up in the second week before peaking in the third. The requests have come down in every one of the last three weeks. (Moynihan, BAC) [C]oming into the second quarter, we’ve actually seen really de minimis draws on the facilities and … we don’t see or feel that [drawdown] pressure now. (Corbat, C CEO) [T]he drawdowns were high in the third and fourth week in March and started to level out in early April. So I think we saw the peak already occurring. (Dolan, USB CFO) … Accompanied By A Surge In Deposits [A]bout half of [the increase in deposits came] from clients drawing on their credit lines and holding their cash with us as they look to secure liquidity. (Piepszak, JPM) It’s worth noting [that] ... we saw many of those draws come back … as deposits. [T]he 75% of loan draws [that] were not used for other paydowns ended up as deposits with [us]. (Moynihan, BAC) The Current Situation Is Unprecedented, … [T]here is no model that [has] dealt with GDP down 40%, unemployment growing that rapidly. … [There are] no models that ever dealt with a government which is doing a PPP program which might be ... $550 billion, unemployment where it looks like 30-40% [of those unemployed will have] higher income than before they went on unemployment, … or that the government is going to make direct payments to people. So what does that mean for credit card [performance]? (Dimon, JPM CEO) The economy is in an unprecedented situation, but not all of the unknowns are bad. The monetary and fiscal stimulus programs will undoubtedly help at the margin, and they may dramatically reduce the second-round effects of the social distancing measures that have strangled activity. We all know we haven’t seen anything like this before. There is no clear path … with a narrow range of outcomes. And so [I just have a very hard time] making an analogy of what this environment is to other environments. Having said that, … we feel like the portfolios that we have are stronger than they were at other downturns as I think they certainly are in many banks out there. (Scharf, WFC) I would just [dis]courage anyone from imagining that at this point in time that any bank has got perfect clairvoyance about … the future …, and whether it gets better or … worse. (Shrewsberry, WFC) Obviously there are many unknowns including how government fiscal and monetary actions will impact the outcome and how our own deferral programs will impact losses, or perhaps the biggest unknown is how long economic activity and conditions will be significantly impacted by the virus. (Donofrio, BAC CFO) … But Credit Performance Might Not Be Horrendous The real question will ultimately be how long this shutdown actually continues, … but in addition to that, how our actions, … the things that we’re doing very actively to help our clients, and the huge amount of government intervention, whether those things will … bridge individuals and small businesses and larger corporations to the other side of this. (Scharf, WFC) It wouldn’t surprise me to continue to have to add to reserves, … [b]ut … what we know is, we’re strong and the industry is strong to be able to handle this. (Scharf, WFC) For years now, we have been focused on client selection. As you all know, what really impacts banks in recession is not the loans put on your books during stress, but rather the quality of your portfolio booked during the years leading up to the stress. (Donofrio, BAC) [T]his isn’t a financial crisis, it’s a public health crisis with severe economic ramifications. … [W]e entered [it] in a very strong position from capital, liquidity and balance sheet perspective. We have the resources we need to serve our clients without jeopardizing our safety and soundness. … I feel confident in our ability to manage through whatever scenario comes to pass. (Corbat, C) I think, generally speaking, all banks are in a good position right now, which is why we’re all able to help our customers while protecting employees. (Cecere, USB CEO) Today we received the first major distribution of the direct payments in terms of the $1,200 stimulus payment. We’re seeing now the unemployment benefits, the extra $600 … coming through. [T]hose programs are just barely hitting the general consumer, general business, et cetera. And so … the stimulus they’ll provide is actually going to be from now on, not from now backwards, because this is a program that didn’t exist literally three weeks ago. (Moynihan, BAC) [T]hese [fiscal and monetary] programs … are extraordinary and should have an extraordinary impact. (Piepszak, JPM) Buy The Banks? The uncertainty around loan losses remains extremely high. No one knows how long the economy will remain locked down, or how long it will take to restart the economy once the most restrictive social distancing measures begin to be relaxed. No one knows how large the package of fiscal and monetary assistance will become, or how effective it will ultimately be. Analysts were clearly skeptical that the amounts the banks set aside in the first quarter as reserves against future losses will be sufficient. They were concerned about the gaps between current reserve levels and the losses the banks realized in the global financial crisis, and the cumulative losses projected under the severely adverse scenario of the 2019 iteration of the Fed’s annual stress tests (Table 1). If the virus drag on the economy persists into the third quarter, as our base-case scenario projects, the banks will likely have to step up their reserving activity aggressively. Given that they were able to do so in the first quarter without impairing their book values (Table 2), however, we think they can handle it. Table 1Loan Loss Reserves Vs. Stress Test Projections Table 2Big Bank Book Values The bull case, as BAC’s CEO put it on the call, rests on the idea that the banks’ quarterly pre-tax pre-provision net revenue – their earnings power – is large enough to absorb the gathering tide of writedowns. After seeing the first quarter results, and believing that monetary and fiscal policy will be able to reduce the overall level of credit losses and spread them out across several quarters, provided the shutdown doesn’t last more than six months, we subscribe to it. We are a buyer of the largest banks on the view that the monetary and fiscal support will reduce and stretch out the inevitable writedowns enough to allow the banks to earn their way through them without suffering meaningful book-value declines. Let’s go back to the beginning on the pre-tax PPNR[.] [W]e feel [that earnings power] has us in good stead in terms of [our] ability to absorb whatever circumstances play out here. The reality is how much earnings capacity [we] have to keep generating capital and … earnings that [we] can offset whatever comes at [us] and that’s what we feel good about. (Moynihan, BAC) Table 3A Solid Month's Work The SIFI put options we flagged four weeks ago have expired worthless, yielding a tidy 9% one-month gain for investors who wrote them (Table 3). That call was founded on the interaction between low book-value multiples and astronomical implied volatilities, but didn’t fully embrace the banks. We are ready to take the next step now because we believe pre-provision earnings will match or exceed the somewhat attenuated stream of credit losses, allowing investors to buy the biggest banks at a price-to-tangible-book multiple with a margin of safety that would comfort Benjamin Graham. We recommend overweighting the largest banks in US equity portfolios.2   Doug Peta, CFA Chief US Investment Strategist dougp@bcaresearch.com Footnotes 1 Please see the April 14, 2020 US Investment Strategy/US Bond Strategy Special Report, "Alphabet Soup: A Summary Of The Fed’s Anti-Virus Measures," available at usis.bcaresearch.com. 2 Our US Equity Strategy service rates the S&P 500 banks group overweight, albeit with a downgrade alert.

Highlights With interest rates near zero around the world, balance sheet policy will become an important driver for currencies. Should the global economy need another dose of monetary stimulus, yield curve control (YCC) and direct financing of governments will increasingly be the policy tool of choice. This will lead to more bloated central bank balance sheets. The dollar will initially rally, as it did in 2008, since the conditions needed for even more central bank stimulus is a deeper than perceived contraction in global growth. Once the dust settles, the global economy will be awash with liquidity, which will light a fire under procyclical currencies, akin to 2009. An important barometer will be the velocity of money. We continue to recommend a barbell strategy for now – a basket of the cheapest currencies together with some save havens. Shorting EUR/JPY is a good insurance policy. Feature Quantitative easing affects the economy and currency markets through three major channels: By lowering interbank spreads and boosting commercial bank excess reserves, the credit channel is widened. Purchases of securities along the yield curve also lowers long-term borrowing costs for economic agents. Central bank purchases of government securities crowds out private concerns. As these funds are redirected out the risk curve, this loosens financial conditions. This is the portfolio balance effect.  Part of the flows from portfolio rebalancing leave the country, especially if interest rates are too low for bond investors. This lowers the exchange rate, boosting imported inflation, which further lowers domestic real rates. During isolated crises, the QE exchange rate channel works like a charm. Chart I-1 shows that for most of the post-2008 period when the euro area was engulfed in a crisis, the EUR/USD exchange rate oscillated with the relative balance sheet impulse1 between the Federal Reserve and the European Central Bank. The story in Japan was similar after the Fukushima crisis in 2011 and the subsequent adoption of Abenomics. In short, the more aggressive a central bank is with quantitative easing, the bigger the impact on currency markets. Chart I-1QE And EUR/USD The dollar seems to be following this narrative. Ever since hitting a March 19 high near 103, the DXY index has been in a broad-based consolidation phase, currently trading around 100. Swap lines are running full throttle as foreign central banks have tapped into the Fed’s liquidity provisions (Chart I-2). Despite this, our contention is that the dollar could still retest its recent highs before ultimately cresting. Chart I-2Improving Liquidity When V Is Collapsing Everywhere Currencies move on relative fundamentals. So, if one country is in a crisis and precipitously drops interest rates, then its currency should collapse relative to its trading partners. However, when interest rates are collectively plummeting around the world, they lose their relative anchor for currencies. In such times, correlations shift to 1, volatility spikes and valuations are thrown out the window (Chart I-3). As a reserve currency, the dollar benefits. When interest rates are collectively plummeting around the world, they lose their relative anchor for currencies. Many countries have announced QE in one form or another, and their balance sheets are set to explode higher, led by the Fed (Chart I-4). But akin to 2008, the dollar can still tick higher as markets remain in the belly of a liquidity trap. In these situations, technical indicators can help. But more often than not, it is usually instructive to sit back and gauge the signal from the velocity of money (or V), especially after interest rates have collapsed to zero. Chart I-3Life At Zero Chart I-4The QE Club V can be summarized by Irving Fisher’s classical equation MV=PQ, where P is the price level in the economy, Q is output, and M is the money supply. In other words, V=PQ/M. A few observations are clear from the equation: If output or PQ is collapsing, then the only way the authorities can stabilize demand is by driving up the money supply. It is an open debate as to whether V is stable or not. Over the last decade or so, V has been collapsing (Chart I-5). Meanwhile, the fact there has been no correlation between prices and money supply suggests that V may have a life of its own. Finally, as the collapse in V accelerates, there is a window in which policymakers can be behind the curve. In this window, zero rates and QE could still be insufficient to stem the decline in output.  Chart I-5A Collapse Of V Everywhere It becomes clear that observing V can provide valuable information for the economy and currency markets. A rising V means that central bank liquidity injections are being turned over into real economic activity, either through rising prices, output or a combination of the two. In a sense, a turnaround in V is a signal that the precautionary demand for money is falling. This is usually synonymous with higher interest rates. Chart I-6Watch The Yield Curve In a general sense, V can be viewed as the interest rate required by the underlying economy (the neutral rate), since it is measured using economic variables. Once economic agents start to increase the turnover of money in the system as activity improves, it is an endogenous sign that the economy has escaped a liquidity trap and can handle higher rates. Over the longer term, exchange rates should fluctuate along with the ebb and flow of V, or the relative neutral rate of interest between two countries. Herein lies the problem. The velocity of money is observed ex-post, meaning it is not very useful as a forecasting tool. We already know from the drop in interest rates that the velocity of money is collapsing everywhere. Therefore, how can one gauge for tentative signs of a reversal? One method is to look at financial variables. The yield curve is one example. Whenever the fed funds target rate falls below the neutral rate of interest in the US, the yield curve usually steepens (Chart I-6). A steepening yield curve usually signifies borrowing costs are well below the structural growth rate of the economy. As such, banks do well in this environment. Another barometer, and our favorite, is the ratio of industrial commodities to financial ones, or more precisely, the gold-to-silver ratio. A steepening yield curve usually signifies borrowing costs are well below the structural growth rate of the economy.  Bottom Line: With interest rates near zero in the developed world, proxies for the velocity of money become important in gauging when we exit the belly of the liquidity trap. Gold Versus Silver Chart I-7Watch The Gold/Silver Ratio The gold/silver ratio (GSR) provides important information on the battleground between easing financial conditions and a pick-up in economic (or manufacturing) activity. The GSR tends to rally ahead of an economic slowdown, but then peaks when growth is still weak but financial conditions are easy enough to lift the economy out of a liquidity trap. Of course, a key assumption is that the global economy fends off a deeper recession, which would otherwise sustain a high and rising GSR. Just like gold, silver benefits from low interest rates, plentiful liquidity, and the incentive for fiat money debasement. However, today, silver has much more industrial uses than gold, allowing it to sniff out any shift in the economic landscape. Silver fabrication demand benefits from new industries such as solar and a flourishing “cloud” orbit that are capturing the new manufacturing landscape. As a result, the dollar tends to be positively correlated with the gold/silver ratio (Chart I-7). The gold/silver ratio has been a good confirming indicator on when to rebuy procyclical currencies. The gold/silver ratio (GSR) broke above major overhead resistance at 100 just as the dollar liquidity crunch was intensifying and is now showing tentative signs of a reversal. The history of these reversals is that they tend to be powerful but extremely volatile. More importantly, the ratio has been a good confirming indicator on when to rebuy procyclical currencies (Chart I-8). Given that the ratio is close to its highest level in 120 years, the odds are that the forces of mean reversion will continue to push it lower. A break in the ratio below 100 will be a positive development (Chart I-9). Chart I-8Tentative Signs Of Improvement Chart I-9Watch The 100 Level The ratio of the velocity of money between the US and China has tended to track both the gold/silver ratio and the dollar closely. Given the epicenter of the crisis was China, a falling GSR will also signify Beijing has been successful in rekindling animal spirits, as the economy reopens for business. Bottom Line: A falling GSR will be consistent with a peak in the dollar and upside for pro-cyclical currencies. Housekeeping We continue to recommend a barbell strategy for now – a basket of the cheapest currencies together with some save havens. Investors can seek such protection by selling EUR/JPY. EUR/JPY should continue to sell off in the short term. First, the yen tends to do well when volatility is high, as is the case now. Second, given that Japan is closer to the Asean economies who were first hit with Covid-19, it will probably see activity recover a little faster relative to the West. In addition, real rates are higher in Japan relative to Europe. Lastly, consistent with our thesis above, place a sell-stop on GSR at 100.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1  Given that GDP is a flow concept, and central bank balance sheets are a stock concept, the impulse is calculated as follows: 1) Take the 12-month change in the balance sheet, to convert it to a flow. 2) Show the 12-month change of this flow as a % of GDP to gauge the impulse of stimulus.  Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been negative: Headline inflation fell sharply from 2.3% to 1.5% year-on-year in March. Core inflation dropped by 0.3% to 2.1%. Export and import prices both contracted by 3.6% and 4.1% year-on-year, respectively in March. NY Empire State manufacturing index plunged from -21.5 to -78.2 in April. Retail sales slumped by 8.7% month-on-month in March, down from -0.4% the previous month. Initial jobless claims increased by 5,245K last week, above the expectations of 5,105K. The DXY index increased by 0.3% this week on the back of safe-haven demand. The break above the psychological overhead resistance at 100 means we can begin to see a flurry of buy orders, as traders move to hedge positions. The Fed’s Beige Book reported sharp contraction in Q1, which should carry on into Q2.  Leisure, hospitality and retail were the hardest-hit industries. Report Links: Capitulation? - April 3, 2020 The Dollar Funding Crisis - March 19, 2020 Are Competitive Devaluations Next? - March 6, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been negative: March consumer prices were released across the euro area: the headline inflation rate was stable at 1.3% year-on-year in Germany and 0.1% in Italy. It increased from 0.7% to 0.8% in France while falling from 0.1% to 0 in Spain. Industrial production contracted by 1.9% year-on-year in February. The euro fell by 0.5% against the US dollar this week. As the anti-dollar and a global growth barometer, trends in the euro will primarily be dictated by what happens to the greenback. The IMF April 2020 World Economic Outlook forecasted global output to contract by 3% in 2020. Moreover, it predicted the Euro area to be hit the hardest, with output shrinking by 7.5% this year, in comparison to 5.9% in the US, 6.5% in the UK, and 5.2% in Japan. 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 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: Machine tool orders kept contracting by 41% year-on-year in March, worse than the 30% decline in February. Money supply (M2) increased by 3.3% year-on-year in March, up from 3% the previous month. The Japanese yen rose by 1% against the US dollar this week. The BoJ Governor Haruhiko Kuroda said that the central bank will not hesitate to further ease monetary policy depending on COVID-19 developments. Possible solutions to support corporate funding include more purchases of corporate bonds and commercial paper, as well as easing collateral standards. More importantly, the government unveiled a 108 trillion yen fiscal package, amounting to 20% of GDP. 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 negative: Retail sales contracted by 3.5% year-on-year in March. The British pound has been flat against the US dollar this week. The BoE’s Credit Conditions Survey showed growing concerns from banks about the outlook during the COVID-19 health crisis. The BoE said that “Overall availability of credit to the corporate sector was unchanged for all business sizes in Q1, but was expected to increase for all business sizes in Q2.” British banks now expect to lend more to businesses in the next three months, more so than to the household sector. 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 negative: NAB business confidence crashed from -2 to -66 in March. Business conditions also dropped from 2 to -21. Westpac consumer confidence plunged from -3.8 to -17.7 in April. The unemployment rate inched up from 5.1% to 5.2% in March, lower than the expected 5.5%. 6K jobs were created in March, down from 26K the previous month, while well above the consensus of 40K job loss. However, the Australian Bureau of Statistics pointed out that the monthly data mostly only covers the first two weeks of March. AUD/USD fell by 0.6% this week. With Australian GDP now forecasted to shrink by 7% in Q2, and another 1% in Q3, the Australian economy is destined for its first recession in three decades. Prime Minister Scott Morrison has pledged A$130 billion subsidy for employers to prevent further layoffs. 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 Recent data in New Zealand have been negative: Visitor arrivals declined by 11% year-on-year in February, down from an increase of 3% the previous month. This trend will likely worsen in March. House prices increased by 0.7% month-on-month in March, down from the last reading of 3.1%. The New Zealand dollar fell by 2% against the US dollar this week. On Thursday, the RBNZ Governor Adrian Orr said that the New Zealand financial institutions were strong and in a position to be part of the solution, while acknowledging that the soaring unemployment and high mortgage debts could pose a big challenge to the economy. Moreover, he said that the current central bank interventions to mitigate COVID-19 damage are just the beginning, and that negative interest rates are not off-the-table. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been negative: Existing home sales slumped 14.3% month-on-month in March, down from 5.9% the prior month. Bloomberg Nanos confidence kept falling to 38.7 from 42.7 for the week ended April 10. The Canadian dollar kept falling by 1.2% against the US dollar this week. On Wednesday, the BoC kept interest rates steady at 0.25%, after having lowered it by 150 bps over the past three weeks. Moreover, the BoC has announced additional measures to weather the crisis, including new purchases of provincial bonds by up to C$50 billion and corporate bonds by up to C$10 billion. The Bank has also enhanced its term repo facility to permit funding for up to 24 months. Report Links: A New Paradigm For Petrocurrencies - April 10, 2020 The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been mixed: Total sight deposits increased to CHF 634 billion for the week ended April 10, up from the previous reading of CHF 627 billion. Producer prices fell by 2.7% year-on-year in March, lower than the expected -2.5%. The Swiss franc fell by 0.3% against the US dollar this week, amid broad US dollar strength. While USD/CHF remains under parity, investors seeking cover from US dollar strength did not find shelter in the franc. Switzerland’s Federal Council has offered emergency loans to almost 80,000 small businesses, far more than other European countries. The most recent IMF World Economic Outlook is now forecasting the Swiss GDP to slump 6% in 2020, followed by a rebound of 3.8% next year. This compares favorably with the slated euro area contraction of 7.5% this year. 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 negative: The trade surplus tumbled to NOK 2.5 billion in March from NOK 18.5 billion the same month last year. After having rebounded by 15% from its March lows, the Norwegian krone fell again by 3% against the US dollar this week, making it the worst-performing G10 currency. The trading pattern of the Norwegian krone in recent weeks has mirrored that of emerging market currencies, warranting intervention by the central bank. OPEC has agreed over the weekend to cut production by 9.7 million barrels per day in May and June, which represents approximately 10% of global supply. Despite the production cut, oil prices slipped this week over growing COVID-19 demand fears and supply concerns.  Report Links: A New Paradigm For Petrocurrencies - April 10, 2020 Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been negative: Headline inflation declined from 1% to 0.6% year-on-year in March, while in line with expectations, this is the lowest inflation rate since May 2016. The Swedish krona fell by 0.8% against the US dollar this week. Sweden’s COVID-19 death toll just passed 1000 this week. While its fatality rate is still well below that in Italy and the UK, it’s much higher than its Scandinavian neighbors, which adds more criticism surrounding Sweden’s decision to ignore the lockdown measures imposed elsewhere. Prime Minister Stefan Lofven has said that stricter measures may be needed going forward, which will pose more threat to the economy. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades