Back month dollars floating on air
April 19, 2020 – Weekly Comment
The low in the US 2y yield was made in 2011 at 15.5 bps. This week it traded 19.9, essentially revisiting that low. At the time in 2011, the five year was around 77 (it made a new low of just over 50 bps in 2012; now 36.4) and the ten year was 175 (now 65.4). Also in 2011 was when gold made its high over 1900. Gold ended this week at 1682. The dollar index in 2011 was around 73, now it’s just under 100. Partially because of USD strength, in other currencies gold has easily surpassed the 2011 highs. What is somewhat interesting is that SPX priced in gold is still nearly 3x higher than it was in 2011, and that’s with the BBB spread to treasuries currently near the same level as in 2011, though in late March the BBB spread easily crested 2011 (but not 2009). In fact, LQD, the Investment Grade bond etf, nearly made a new all-time high this week, closing at 130.56 having plunged to 105.5 on March 19. The all-time high at the beginning of March was 134.27.
The rally in SPX this week leaves it down only 15% from all-time highs in Feb, but when priced in gold, it’s down 21%, and down 30% against the high in 2018.
In general, the last decade has been the triumph of financial assets versus hard assets. The fact that SPXGLD remains starkly below the low made in 2018 signals that this time the Fed may not be able to engender a similar episode of paper prosperity. However, Friday’s stock surge on hopes that Gilead’s drug showed promise in defeating COVID opens the possibility to another outcome. With the unprecedented amount of fiscal and monetary stimuus in the pipeline, if there was an immediate medical breakthrough, stocks would likely briefly spike well through this year’s highs.
What is awfully hard to reconcile in this environment is the level of deferred eurodollar contracts. While the two year note is just AT the previous low yield of 2011, eurodollars have made lower yields/higher prices. The second red, now EDU21, settled at 9972.0 or 28 bps on Friday. The all-time high in 2012 was 9963.5. The second green, now EDU22, settled Friday 9961.5 and topped at 9945 in 2012. For blue EDU23, the top in 2012 was 9911.5 and it settled 9946.0. This at a time when SX7E, the EuroSTOXX bank sector, is 51.27, just half of its value at the high in mid-Feb. KBE, the US S&P Bank ETF is down 40% from February. JPM is tightening lending standards for households, requiring hihger credit scores and downpayments for mortgages and suspending new HELOC lending. In spite of Federal assistance, downgrades by rating agencies and actual bankruptcies are expected to explode. If there is still any sort of a credit aspect embedded in ED contracts, they shouldn’t be this high.
The numbers relating to loss of income and output are staggering to the point of being incomprehensible. Over 20 million US jobs lost in a month. China Q1 GDP -6.8%. US estimates for Q2 GDP range from -20% to -35%. There appears to be a large disconnect between the relative strength in financial assets and what is occurring in the real economy. Almost certainly this comment by Kyle Bass is seeping in, “…the misery that China has brought to the rest of the world with this virus has really been shining a disinfecting light on global supply chains reliance.” What will follow is less global trade, and a cushion build-up of inventories across many businesses. At the same time, the plunge in commodities led by oil, and other prices will almost certainly reach bottom in Q2. Year over year comparisons by the middle of 2021 should begin to show significant increases, no matter how the actual economy is doing.
| 4/9/2020 | 4/17/2020 | chg | ||
| UST 2Y | 22.3 | 20.4 | -1.9 | |
| UST 5Y | 40.8 | 36.4 | -4.4 | |
| UST 10Y | 72.2 | 65.4 | -6.8 | |
| UST 30Y | 134.8 | 127.4 | -7.4 | |
| GERM 2Y | -62.0 | -67.9 | -5.9 | |
| GERM 10Y | -34.7 | -47.2 | -12.5 | |
| JPN 30Y | 44.9 | 49.6 | 4.7 | |
| EURO$ M0/M1 | -26.0 | -17.5 | 8.5 | |
| EURO$ M1/M2 | 12.5 | 8.0 | -4.5 | |
| EUR | 109.43 | 108.75 | -0.68 | |
| CRUDE (1st cont) | 28.82 | 25.03 | -3.79 | |
| SPX | 2789.82 | 2874.56 | 84.74 | 3.0% |
| VIX | 41.67 | 38.15 | -3.52 | |
