Investment Idea

Fed balances on the threshold of repurchase

14 Apr 2020 | 5 min read

For each crisis wave, the central banks take another step among the asset classes to manage the crisis. We see it more as a symptom relief than as a remedy for the actual causes.

For each crisis wave, the central banks take another step among the asset classes to manage the crisis. We see it more as a symptom relief than as a remedy for the actual causes.

Demand for electricity is declining worldwide. The usual economic indicators that the market follows, we know, do not work with rapid changes. Above all, this applies to all purchasing´ managers indices. After all, they have been sticking to changes since the last measurement day, which creates strange data.

GDPNow from the Atlanta Fed is a model that has had its shortcomings but been able to predict GDP growth in the United States. Initially, it shot slightly above the target, but all over time the developers have refined the model.

But if we look at the current forecast, one wonder if the forecasters have smoked something strong.

The green line shows GDPNow. It continues to show 1 percent growth for the first quarter of 2020. Compare this with consensus that falls quickly below minus 2 percent and approaches minus 3 percent. The problem with GDPNow is that it is an economic model that strictly calculates forecasts based on given input. Now that the market is going through a shock, input data will not have any impact on the forecast. Note the embarrassing disclaimer on the left that the Atlanta Fed is forced to do, where they explicitly write that GDPNow does not take Covid-19 into consideration.

The St. Louis Fed has its own model called GDP Nowcast. On the contrary, it shows a steep fall in GDP for the United States. In other words, the uncertainty in the forecasting models is far too great. An alternative way, which we also have pointed out several times, is to monitor electricity consumption. You can look at electricity generation as much as electricity consumption and electricity production must charge each other since it is not possible to store electricity in any appreciable quantities. This is what researcher Steve Cicala does in the essay: “Early Economic Impacts of COVID-19 in Europe: A view from the grid”.

He notes that electricity consumption is clearly falling in Italy.

The decline is around 20-30 percent against normal.

In the UK, the decline is 10-20 percent.

The impact across the EU is a decline of between 10 and 15 percent

The question that remains to be answered is whether these figures are directly transferable to GDP changes. The answer is that previous studies have shown a 1:1 relationship between the two, but this type of shock is new. Homework can weigh some if 1/3 of the work can be done from home. But regardless of the exact relationship between electricity and GDP, the figures show a very sharp fall.

The second scale contains the various measures taken by the authorities to support the economy.

If we look at the different support programs, QE1 (quantatative Easing 1) was the first program introduced in the autumn of 2008 and spring of 2009. Note that QE2 had a steeper turn-on while QE3 was at the same rate of increases as QE1. But in order to have an effect this time, you strike twice as much faster. Not only do the amounts increase. QE1 began with house bonds (MBSs) and continued with government debt and bonds.

In Japan, the Bank of Japan already owns 50 percent of outstanding bonds. In the UK, people are no longer pretending, but the Bank of England now buys bonds directly from the state, without passing the market.

We have been waiting for the last step in the US. It´s because the Fed is trying to proactively prevent US companies from falling over by buying fixed income securities in the bond market. The table above shows instruments that may be covered by the Fed´s new support purchases.

On Thursday last week, S&P 500 tried to break above Fib 50, but it failed as trading turned negative on Monday. EMA9 and MA20 as well as MACD is on the rise implying that momentum is getting stronger. Fib 50 remain as a first level of resistance on the upside followed by MA50:

Worth noticing is the bearish upwards sloping wedge-formation that tend to break on the downside. In case of a break to the downside, the formation calls for a setback of about 14 percent.

However, during Monday Trump said that a decision will be made soon to restart the economy and futures are trading up this morning.

Nevertheless, the tech-heavy Nasdaq index closed Monday´s trading up but is struggling with Fib 50 as well as MA200. Nasdaq is trading above a rising EMA9 and MA20. Note how MACD is getting close to generate a strong buy-signal. The next level on the upside is made up by a falling MA50:

However, a bearish rising wedge is visible even for Nasdaq. A break on the downside call for a setback of about 15 percent. The first support is made up by EMA9.

Amazon may turn out to be a winner when this Corona-crisis has passed by. This is since the company´s market position may improve as competitors struggle and even run out of business. The Amazon stock is also getting close to a previous top from February serving as a target level and a resistance. Note also how MACD has generated a strong buy-signal:

The Netflix stock is not getting hit as hard as people stay home enjoying movies and series instead of working. As can be seen in the graph below, the share also closed above previous tops from February. Next level on the upside can be found around 420 where the share was trading during the summer of 2018:

A rising EMA9 is supporting the stock from below. The question is if Netflix will be a winner from the Corona-crisis in the long-run.

The OMXS30 index is still lagging S&P 500 and Nasdaq as Fib 38.2 remains to be broken. EMA9 and MACD is rising. MA20 is turning upwards implying that momentum is increasing. In case of a break on the upside, Fib 50 serves as the next level:

Note that a bearish rising wedge also can be seen in OMXS30. EMA9 function as a support to the downside.

The German DAX index closed Thursday´s trading above Fib 38.2. The next level on the upside is Fib 50, slight above the 11 000-level:

EMA9 is rising and MA20 is turning upwards. However, once again a bearish rising wedge-formation can be found.

OPEC and its allies including Russia agreed on a record cut in oil production on Sunday. The United States is also taking part of the deal that can reduce output by 20 percent, globally.

However, as seen in the graph above the market is still trying to grasp if the effort will offset a declining demand. Brent-oil is still trading below Fib 23.6. In case of a break to the upside, the next level can be found around 38.3 USD/barrel.

The USD has started to weaken against the EUR. The currency pair is facing resistance in form of a falling MA50 and Fib 38.2:

A weaker USD has given an extra boost to the gold price that is currently trading above its previous local top from early March. The next level can be found around 1 770 from year 2012: