The week that will be 05 October – 10 October
Trump has been found out for the reckless incompetent fraud that he has always been. The brazen manner in which he and his inner circle have ignored the advice of their own federal health specialists will be recorded as so negligent as to be criminal.
Although nothing is over until the ‘fat lady sings’ polling numbers consistently reflect the imminence of Trump’s defeat at the hands of the thoroughly decent but economically dangerous Joe Biden.
Compounding the ills of the time unemployment numbers and their late trends have started to undermine the rhetoric surrounding the case for a ‘V’-shaped recovery.
Believe us when we tell you that it is not coming any time soon to an economy near you.
Confirmation of the fear and trepidation that the employment numbers create, personal consumption, upon which the economy is so dependent upon, is being squeezed by the twin forces of declining income and increased savings rate all over the world.
We have cause to be concerned when the South African bond and equity markets do not follow the relative strength of the Rand over the last 3 – 4 weeks.
Equivalent 10-year government bond yields have traded sideways since late May but at higher levels than before the lockdown.
South African equities topped in November 2017. What does this and the next few weeks hold for South African assets in what has been historically the weakest seasonal period in global financial asset markets.
International oil prices look to have conclusively turned lower this last week. This coming week promises some sharp moves to the downside as technical support levels are eliminated.
Lastly, we look at the shape of the US Equity Volatility Index curve. It is crystal clear that this market, despite the elevated levels of equity markets, relative to earlier in the year, is concerned with economic and political factors that may become acutely unfavourable in the last quarter of 2020.
Trump as Hamlet
“The jarring contrast between the carefree, cavalier attitude toward the virus on display in the Rose Garden last Saturday and the pernicious awakening that occurred Thursday night resembles a Shakespearean tragedy.” Washington Post 3rd October 2020
Like Hamlet, Trump has fatal flaws that have led him to the point where he faces the ignominy out of office because of his inability to deal effectively and immediately with the terrible magnitudes of a maladministered federal plan of action.
Now the consequences are immediate and personal. Karma, it seems, knows the address, 1600 Pennsylvania Avenue. Trump has no one to blame except his own childlike and reckless behaviour.
It will probably cost him the election, as one of the key swing states, Pennsylvania has moved into Joe Biden’s favour.
The election is Biden’s to lose, should the American electorate harshly judge Trump for his idiocy and recklessness.
Employment and Personal Consumption Concerns
We have consistently been on record, over the last months, that this propect has been fanciful in the extreme. On our website we have posted a paper, which points to the long-reaching multi-decade impacts of global pandemics.
In a report published earlier this year, the International Labour Organisation estimated that 195 million jobs could be lost worldwide.
In the United States, the eye of the storm, unemployment is a critical indicator of poor economic conditions to come.
Initial and continuing claims are still at rates without parallel. Estimates by some economists in the US estimate that true recovery is only kickstarted when intial claims fall to +/- 500k. Currently, the weekly count is sticky around 850k.
The US unemployment rate at first glance, somewhat confusingly, is falling. That is because the total workforce is calculated as the sum of engaged workers plus those actively looking for work. Many have ceased looking for work, so the unemployment rate is calculated off a smaller denominator.
This is confirmed by the disappointing non-farm payrolls number released on 2nd October.
Unsurprisingly, household and personal consumption and savings habits are going to be dramatically influenced by factors such as job security and offerable wages. Although personal income numbers are only falling back to pre-Covid levels, savings for the moment are considerably higher than even in January 2020.
For modern economies, South Africa is one, which are consumer-spending oriented any fall in personal consumption will have a strong negative impact on future growth prospects.
South African Markets
Rand denominated bonds haven’t got the ‘risk-on’ memo yet. The Rand has performed well but that has yet to feed into the fixed income market.
With short-run policy rates anchored around 3.5% the government and other yield curves in South Africa are maintaining a relatively steep posture. This is in contrast to the flattening trajectories in other markets around the world.
The South African equity market doesn’t know the good news either. The Top40 market has gone sideways since the end middle of June trading at exactly the same level on the 15th June as on the 2nd October. For the year it is down 3.30%.With short-run policy rates anchored around 3.5% the government and other yield curves in South Africa are maintaining a relatively steep posture. This is in contrast to the flattening trajectories in other markets around the world.
In point of fact, the South African equity market topped way back in November 2017 and equivalent 10-year yields bottomed in March 2018, so dire has South African financial and economic performance been.
Energy – WTI Futures
Despite what has been described as a risk-on week in international financial markets, oil futures have traded decisively lower, falling 9.00% from Monday through Friday’s close.
This performance, to my mind, makes crystal clear the disconnect between financial markets and the real economy. A number of financial markets, equity and credit in particular demonstrate peculiar strength.
Valuation levels in equity markets are at extreme levels.
Bond credit spreads remain relatively compressed while banks across the globe provide against ever higher levels of impairment.
Commodity markets, such as oil, are however where the real world meets the financial markets. West Texas Intermediate has spent the Northern Hemisphere summer trading sideways. Despite recent drawdowns in stocks, oil looks to be rolling over lower, possibly putting US$ 30 a barrel in its sights.
Equity Implied Option Levels (VIX)
Equity index option volatilities remain elevated. This despite the seeming security of valuation levels and the stated confidence of market participants.
As with the oil market, I am struck by the disconnect. The chart below reflects the response to Trump being confirmed as Covid-19 positive on Friday 2nd October. The VIX spiked a few percent across the implied curve, despite the S&P500 closing the day virtually unchanged on the previous close.
The markets are full of contradictions at the present time.
No doubt they are buoyed by the volume of liquidity being offered by the world’s central banks. This liquidity is being offered at virtually zero nominal rates.
BUT, as Milton Friedman presciently noted 50 years ago, low NOMINAL interest rates are not always consistent with easy credit and investment conditions. This next week promises to be as volatile and unpredictable as the last has been.
September and October are historically the season where the most volatile and weakest conditions have visited financial asset markets. It pays to be cautious in hedging or trading strategy, as well as market expectations.