About market optimism and its reasons, money wins

28 de abr. de 2020

Central banks have so accustomed financial markets to stimulus that they expect more and more money from each new meeting of the Central Banks. This week three leading Central Banks will announce their decisions on the parameters of monetary policies: the Bank of Japan, the Fed and the ECB.

The Bank of Japan has already met these expectations by increasing the limit for the purchase of corporate bonds and commercial debt securities - up to 20 trillion yen. But most importantly, the Central Bank confirmed the expectations of the markets regarding the rejection of the limits on the purchase of government debt (previously the size of purchases was limited to 80 trillion yen per year). This means that any government initiative to provide economic aid in Japan will be funded by the Bank of Japan. The Central Bank left the rate unchanged.

As a result on the start of the day, the stock markets gladly accepted this news. This is another portion of steroids to continue the crazy and thoughtless growth. Since we consider madness to be temporary, our recommendation to sell in the stock markets remains relevant. The global economy is experiencing the worst crisis since the Great Depression, but the stock markets are at the levels of December 2019, when no one could even imagine what is happening now in a nightmare.

To understand how much current prices are divorced from reality just look at the latest Adidas report. Profit fell 95% (!). Since this week, 173 companies out of 500 in the S & P 500, including Apple, Amazon, Facebook and Microsoft, are reporting on the results of the first quarter, it is possible that markets will accept reality very soon.

Another reason for general optimism was the information that most countries after a month of lockdown are not ready to support it further in the strictest form and are preparing to gradually soften the conditions. Rationale - the peak of the pandemic has passed. Considering that last Friday, was recorded an absolute maximum for the daily new cases, it is obvious that this is an attempt to give the wish for a real, but in fact, just a desperate measure. If at first it was decided to sacrifice the economy, now the choice is inclined "in favor" of people. Money ultimately turned out to be more important than lives.

Note that Britain does not support this initiative. Considering that the country's economic data have recently been worse than ever, the euro may well get a handicap against the pound, so we recall our recommendation to buy a pair of EURGBP.

The deepest depression continues to reign on commodity markets, and therefore we recommend opening medium-term short positions in basic commodity currencies: the Australian and Canadian dollars. Australia's exports are totally dependent on the commodity market (70-80% of the country's exports are raw materials), while Canada, in turn, is highly dependent on the situation in the oil market.