Never believe a rumour unless it is officially denied

Never say never on negative rates

There were rumours on Friday that the Fed is moving into negative interest rates. The one-year rates are already trading negative. The Fed has denied this rumour. Seeing the experiences of Japan and Europe, the Fed may not want to go there so early in the game. As the saying goes, “never believe a rumour unless it is officially denied.”

The recent Fed survey suggests close to 25% of all job losses due to the corona story will be permanent. Which means – a lot of people who are serving time at home will not return to work. Not only that, most of them will not show up in the official unemployment figures. They have lost hope and they don’t want to try for a job.

Unemployed doesn’t mean you don’t have a job. It means you don’t have a job and you are looking for a job. So, a lot of people will be dropping out of the labour force. Think what that can do to the economy!

The US Government and the Fed are already preparing for the next line of stimulus. One good thing is that the Democrats and Republicans are not much in disagreement for the amount of stimulus. They disagree where it should be allocated.

All eyes are on Georgia where the economy was re-opened on Apr 24. In a couple of days, it will be three weeks. The progress so far is positive but that doesn’t mean the same can be applied to other States easily. It all depends upon the geography, demographics, density of population and many other factors. Nonetheless, it will be a confidence builder for other States to follow their own path. Let’s turn to the markets.

Equities

A certain sector of the equity markets has been doing very well. A narrow number of high-tech and pharmaceutical companies are rallying strongly while the broad market is struggling.

In this so-called world war 3, holding pharmaceutical stocks are like owning steel and defense stocks in World War 2. The performance of the NASDAQ and the DJIA is at its widest in the last twenty years. This only confirms our theory that when the trend reverses the down move will be much severe than the up move.

There was negative breath in the S&P & NASDAQ rally yesterday, meaning there were more shares declining than advancing. In addition to that, 76% of the up and down volume on the NYSE was to the downside versus 24% to the upside. The behaviour in the CBOE intraday equity put/call ratio was more pronounced than what we reported in the last report. In a nutshell, optimism remains very high and a turnaround could be anytime soon.

Bonds

As we have been discussing, the 30-year bonds have been coiling in a price range for a long time. The pressure is building up for a downside break. A move below 178 will be crucial.

Euro

The Euro could have completed its corrective upside pressure at 1.0876 on May 8. The down move should be progressing soon and should challenge the lows at 1.0635 on Mar 22.

Gold

There is nothing much to write on gold and we still go by the belief that a significant top was made at 1748 on Apr 14. However, we want to emphasize that there is a chance that gold can break up above this level, to fall back again as the market is so bulled up on the metal. A move below 1660 should eliminate this possibility.

Be safe. Be small. Be home.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.