August 22, 2019 - Financial Occultist

Client note from GS overnight, in summary:

A global recession is likely to see falling US yields alongside falling US stocks
USD/JPY the most likely pair to weaken

GS cite

US/yen falls during risk-off periods as investors move into the safe-haven yen
BOJ yield curve control policy fixes nominal yields in Japan, thus a US yield fall makes a more favourable Japan / US differential

(hmmmm …. the BOJ have allowed JGB yields to drift lower …. and regardless, while the differential might improve as GS suggest its still positive for US assets. Anyway, back to GS … )

not expecting a global recession in the near term
but do not a a drop in activity ex-US

Other trades GS like in the event of a global recession when US stocks drop:

long AUD/CLP, EUR/PLN,
short NOK/SEK, EUR/CZK and EUR/CAD

EUR/USD forecast to 1.10 before the end of the year (might be a little quicker than that though ….)

22-Aug-19 04:18 am

Anirudh Sethi

A forecast for euro against the USD to fall to 1.10 before the end of this year.

Well, yeah. Not like there is far to go.

The forecaster, to be fair, has been calling it lower from a lot higher than here. After 1.10:

Rabo then expect it to trade to 1.15 on a 12 month horizon

Say the moves in Germany could prove supportive:

perhaps the German government will bow to calls of a fiscal belt loosening has breathed a little support into the EUR

On the European Central Bank:

In September it is likely that the outlook for the Eurozone and the reactions of the ECB will be instrumental in determining the direction of EUR/USD

On Italy:

the market has reacted well to the assumption that Italy could avoid a snap election and another budgetary battle with the EU in the near term
Italian politics combined with Brexit risks remain potentially negative factors for the EUR

On the Fed:

our expectation that the pace of Fed rate cuts are likely to accelerate in 2020 suggest that there is still scope for EUR/USD to head a little higher medium-term and we maintain our forecast of 1.15 on a 12 month view

US stocks erase yesterday’s declines (and then some) and close with decent gains

22-Aug-19 04:15 am

Anirudh Sethi

Ignores the 2-10 going negative again

The US stocks erased the declines from yesterday (and then some). The gains also ignored what was a flattening of the yield curve to flat 2-10s again (although positive now by a basis point or two).

The final numbers are showing:

The S&P index +23.92 points or 0.82% at 2924.43
The NASDAQ index of 71.646 points or 0.90% at 8020.20
The Dow industrial average of 240.29 points or 0.93% at 26202.73.

Below is a summary of the % change high/% change low/% change close for the North American and European major indices. Most European indices had an even better day.

Below are the changes and ranges for the US debt curve (from 2-30 years). The 2-10 spread is 1.53 bps currently, down from 4.32 bps at the close yesterday. The thing about today’s move is the yields are higher across the board with the shorter end up more due to the taking out more of the 50 BP cut idea.