Macro Dragon: The Price Action = The Price Action

2020-Feb-05

Macro Dragon: The Price Action = The Price Action  

Overnight Risk-On & thoughts…

• We had the biggest one day pop up in the SPX since Aug, with a +1.5% move on cash to 3298. It was also a case of Iowa causes be damned, as the Democratic party completely face planted in their handling of the Caucuses which ended up with as of this Morning Asia Weds – still no official winner.
• Likely good for Biden who looks like he will finish 4^th, yet bad for Peter-B who looks like he crushed it – at 38yr old & gay, this is a welcome surprise to KVP, who did not expect the Iowa voters to be so woke. Worth noting that Iowa is far from representative to the rest of the country, yet this could give Peter-B some afterburners he would never have gotten, its also almost assures that he will run in 2024 if Trump stays. KVP still thinks an ACE move, other than ACO for VP (Apparently at 30, that’s too you), but Peter-B would be an awesome VP to either Warren, Bernie or Biden…
• This one tweet captured the Iowa process more eloquently than any words that we can construe together on Macro Dragon.
• Kudos to clients & peers who were nimble enough to play the squeeze higher & flexible enough to turn their tactical books around after being right & profitably bearish coming into this wk.
• Macro Dragon came into this wk with  bearish skew & the thinking that – at least for this stage of the coronavirus – we were going to see max bearishness peak in this wk to latest early next week… yet super surprised to see how strong Asia & China was out the gates on Monday. Yes DollarYen downside was a great call from last wk, yet only lasted until Mon Morning Asia – still 80 pips is 80 pips. And tactical gold shorts overnight worked well as a play on the risk-on, as the price action on gold on any risk-off continues to be abysmal.
• This was on the Saxo Wire this morning.

• Asia Wed Open: O/N saw biggest S&P gain since Aug, with +1.5% 3298, Nas-100 +2.3% 9334, DAX +1.79% 13274, HSI was +1.21% 26676, VIX -10.7% to 16.05. Iowa = disaster with no clear results. Gold -1.51% to 1553, UST 1.6077, USDJPY +0.76% 109.52, USDCNH -0.33% 6.9908. Risk-on start
• Call it liquidity, call it FOMO, call it a synthetic market, call it buy the dip, call it the blowoff top effect, yet from a US equities side we only managed a c. -3.70% drawdown from the highs. The astounding thing is, before the sell-off the positioning on the long side was the biggest we had seen by almost any measures out there.
• One key takeaway for KVP is again – don’t play risk-off with US equities… do it either with treasuries (which should be a core long anyway, just have a trading clip) or equities that have underlying EZ, EM or Asia exposure.
• Also don’t mistake the day to day price action for the underlying fundamentals – the deflationary shock will still feed through both economic data & corporate earnings (&not just Chinese/Asian company earnings… but your Apples, US Autos, Star$, Macau gaming names – city closed down operations for half a month, etc), as well as have positive impact on things like Tencent, Baba… think content, streaming, delivery, services in China that limit need for contact or stepping out of your home, office, etc.  
• And definitely don’t mistake it for the virus being nipped in the bud, yet we do know there will come a time when markets stop to care about the coronavirus. Question is, has that time come now? KVP is unsure… what he is sure of… there will be more higher probability tactical situations at some point & for now, the price action is the price action.
• Again, KVP would neither be surprised if we got obsessed with the Virus again (perhaps Asia will disconnect from the US) & reversed or kept selling off. So tactically neutral on price action, still strategically long US duration – clearest takeaways behind this still stand. The probability of a Fed cut & magnitude of that cut have increased post this deflationary shock & KVP can envisage a 2020 where US10s get sub 1.00% from these 1.61%.
• Obvious key risk is overestimating this deflationary shock & potential overlooking of the pullback in economic activity & corporate earnings for the stimulus that would come and/or a much stronger US economy that picks up the slack that we lose from a temporary weaker China & Asia.

• Do watch out for US ISM Non-Mfg. figures tonight 55.1e 55.0p, these will be post the blowout beats we got on the mfg. on Mon 50.9a 48.5e 47.2p – which no doubt contributed to the bulls finding legs.
• Before that we should be getting Trumps State of the Union that should be kicking off 21:00 ET, c 10:00 SGT/HKT/CST

2019-nCoV Update Wed Asia Mrn 5 Feb…

• We’ve expanded our thoughts this wk with a combination of updates, potential scenarios around opportunities & risk surrounding the Novel Coronavirus (a.k.a. 2019-nCoV / Wuhan Coronavirus) on Tue 4 Feb, start of WK 6 Mon 3 Feb, here on Fri 31 Jan, here on Thu 30 Jan, here on Wed 29 Jan & here on Tue 28 Jan.

Quick update & thoughts on the Virus since Tue check in:

• China can do the impossible!
• Let KVP repeat this again. China can do the impossible. Two hospitals in c. 10days, there is no other country on this planet… let alone the US (probably takes 2yrs just to get the permits)… that could accomplish that. In fact China’s ability to concentrate a huge volume of the smartest people on the planet, with unlimited resources & no rule book is a godlike edge, that no other country-institution-group can match. So with these hospitals now starting to accept new patients, intuitively we should see a jump in confirmed cases as the suspected cases are well over 20,000.   
• As of this Wed Asia morning, the “official figures” are at c. 24,553 confirmed cases, +492 deaths & c. 852 recovered. KVP reckons closer conservative number of infected is likely +25,000 to 50,000 on the mainland… & before its all over we are likely going to be well in the 6 figures… if we are not yet there.
• We did have some pretty big jumps in effected outside of China: With +6 in Thailand to 25, +6 in Singapore to 24 (& these were passed on in SG, i.e. not the classic case of someone from Wuhan/Hubei going somewhere else & being ill there), +2 in Japan to 22, +2 in HK to 17, +1 in SK to 16, +1 in Au to 13, +2 in GER to 12, +1 in Taiwan to 11 & now we have Macau as well as Malaysia entering our minimum 10 cases list.

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Have a fantastic wk ahead everyone, good luck on the month start, stay healthy as well as keep your mind open to profitable & abundant opportunities. Life happens for us, not to us. 

Namaste,

-KVP

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Some Anchor Pieces from #SaxoStrats:

• Jakobsen & SaxoStrats team with our 2020: Outrageous Predictions

• Our latest 1Q 2020 Quarterly Outlook: The Great Climate Shift

• Eleanor on a Meta trend: Climate Deeply Embedded in Risk & Opportunity

• Garnry on The Godzilla theme: Green stocks are the next mega trend in equities

• KVP on the Fed: The Half-Life Fed & Min. One Cut By 1H20