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* this is not a trade recommendation and for educational purpose only. please do your own research.

2020 – The COVID19 Year – “how it started and how it ended”

Happy New Year 2021 !

And 2020 , a year nobody will ever forget.

On any possible scale.

Word of the year: “unprecedented”

It affected every personal life with restrictions nobody was ever expecting, being locked down at home, having travel bans, sport events cancelled, if not losing jobs than working from home if possible in nearly every country on earth. Because of a virus.

Who will ever forget the moronic toilet-paper-roll run in the supermarkets, or endless empty shelves in March making the news headlines. People panicked.

The market reaction in every asset class, a once in decades x-sigma move – some even historical.

The central banks and government fiscal rescue responses. And with that, the rebound and RiskON wave.

All other events, such as the Saudi-Russia oil war were a almost a temporary side show. The US election was as ugly as one could have expected. And BREXIT negotiations came to the least possible solution after the June 2016 referendum.

Here is a Macro and Technical recap and current view:

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The “Unprecedented”

• Initial Market Reaction
• Vola Risk, Credit Default Risk, Market Risk
• Central Banks Reaction

TECHNICALS SENTIMENT

• FICC & EQUITIES
• Fixed Income (US, Europe)
• Currencies (G10, EM)
• Commodities (Energies, Metals, Softs)
• Equities (US, International, Relative Values, Themes)
• Global Cross Assets Momentum/Trend Scores, Performance heatmaps
• Risk Gauges Matrix

MACRO SENTIMENT

• US & EUROZONE
• Business & Consumer Confidence
• Macro Matrix & Cycle Indicator

COVID

• Global Lockdown “Fear-o-Meter”
• Corona Maps: How it started…how 2020 ended

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2020 – “Unprecedented” = word of the year

Initial Market Reactions:

Vola Spike e.g. VIX

Yes, VIX spiked to near 90, but on a rolling 4wk chg it still blasted higher then GFC fear.

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The intra-week high during GFC was 96, and CV19 87, but on a weekly closing basis, GFC high was 79 and CV19 was 66. Still, shocking once in decades.

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Credit Default Risk Spike e.g. CDX NA High Yield:

During the GFC credit spreads rose higher and for longer, but on a 4wks rolling basis, CV19 topped GFC.

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The credit default risk during the GFC was so much higher that all central banks incl the FED learned from that episode so they acted quicker and much more forceful during CV19. QE infinity.

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Stock Market plunge e.g. DOW Jones:

Doesn’t matter to use SPX or NDX, it’s just one example, but DOW collapsed more on a 4wks window than the Oct87 crash, Sep11 attack sell-off and the Lehman and co event. And it also regained quicker than before. “Unprecedented” word of the year.

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Oh, was this the quickest bear-market ever ? Was this global pandemic sell-off just a another dip ?

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STIR (Short Term Interest Rates) Market & Central Banks Reaction:

“Unprecedented” measurements from monetary and fiscal side. Short term yields plunged as fast as GFC. 4-5 events in the last 35 years.

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Back to ZIRP. And for long. Nice try to hike until 2.50% in 2018. Now use your drawing trendline skills here: go !

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Global Central Bank Balance Sheet Monster: e.g. FED & ECB

QE and ZIRP to infinity and beyond. Deal with it.

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TECHNICALS SENTIMENT

FICC & EQUITIES

FICC “Fixed Income, Currencies and Commodities” … so, I too break it down into those, let’s dive in:

FIXED INCOME

US Interest Rates, one of many leading indicators and in the current state of the business cycle it usually points up = steepening. Although this time it’s Bear-steepening. Slow grinding though, but a theme throughout 2020 and most likely will keep going in this direction for 2021.

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US 10Y Treasuries: No need to look into very short maturities, as FED is on hold for a long time, hence 2Y and even 5Y won’t move that much in the foreseeable future. Focus should be on 10s, 20s, 30s. Here is the chart for 10Y Treasuries, yields collapsed in save haven bid early on, but stalled as soon as RiskON started. No real momentum, but a small change of “trend” (if one want to call this). As the economy is restarting, commodities prices are picking up (or rallying hard), yields IMHO should go higher further. Given the circumstances perhaps not “to the moon”, but grinding higher 2021.

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30Y Bond Futures: with the longest duration, obviously the mirror image of the yield chart. Went totally parabolic in panic mode March, and has rolled over since. Unless there will be some dramatic change and the global vaccine doesn’t work at all, bonds are “sell rallies mode”. Bond Futures rallied +23% Jan-Mar.

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For those who can’t trade bond futures, TLT or ZROZ ETF … TLT rallied +32% Jan-Mar, shell-shocked -22% off that peak, rebound and yo-yo ing rest of the year with rolling over bias. ZROZ ETF pendant rallied +52% Jan-Mar, fell -28%, rallied back +30% …

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Overview major 10Y Govt bond yields: a stark reminder, if the “sh*t” indeed hits the fan and before central banks intervene, the market reaction is always the same: bid into UST, Bunds, and sell BTPs etc. But as ECB stepped in yet again, institutional bond investors found again their balls and jumped into BTPs near 3% ending up with 200bp gain, whereas the majority here is flat out or slightly higher yields.

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German Bunds: after the initial panic buy into <the> safest haven, most realised at -90bp is not really a bargain anymore, then flipped back even faster then yields dropped. in 4 trading sessions from -0.75% to -0.15%. “so much more supply with that sort of bail-out” was the headline. But, over the year it traded back to lower yields, still safety bid besides the vaccinations and hope. What inflation ?

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Italian BTPs: “Mamma Mia”. The European covid19 pandemic started in Italy, Lombardy, remember ? Chinese fashion design workers flying back to their Italian homes. Anyways, BTPs were sold quicker than you could lock down the house and yields shot up from 1% in Feb to 3% in March. 200bp is a massive move here in this short period of time. FED, ECB, monetary and fiscal rescue packages meant backstop for BTPs too. 0.55% now.

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CURRENCIES

First chart are each of the G10 currencies against the other G9 as a basket for a complete relative comparison. One clear message here is flight to quality is US$ bid, or short squeeze, as everyone scrambled to get US Dollars. And of course the typical bid into JPY and CHF. As the global economy started to collapse, commodity driven currencies such as NOK, AUD, NZD had to nosedive.

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Zooming in after monetary & fiscal interventions: March points to the “bottom of market fear” and the RiskON theme start. Throughout the year it wasn’t Cable strength or Ozzie comeback itself, it was one main theme: weak US$. RiskON = sell US$ haven. sell JPY haven. sell CHF haven. core G10 commodity driven FX NOK, AUD, NZD were in the end the basket winners.

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US$ vs the G10 basket = one-way street once panic stopped.

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The Cable rallied +20% from the March bottom, but this had little to do with UK outperforming, or BREXIT negotiations. The British Pound has gone nowhere in the G10 basket. It is nearly -4% weaker in fact.

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The EURO wasn’t the hero either in the basket (+3%) , but naturally gained +9% vs the USD. Technically speaking, after the initial boost and hovering between 1.16-1.20 Jul-Dec, it finally broke out of that box to rally towards 1.23. Not sure if Mdme Lagarde really like to see this strength as it doesn’t help exports in the current weak economic climate.

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The classic RiskON/RiskOFF currency pair AUDJPY. Commodity driven and China dependency vs ultra dovish QQE BoJ safety haven JPY. (Although even RBA has gone into QE and interest rate is at 0.5%). Anyways, as a proxy leading indicator it did what it always does. A sentiment reader despite not being a classic carry trade pair anymore. AUDJPY gained +4.3% in 2020, or +25% since March bottom.

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China, USDCNH, where there was so much headline talk about the world market will collapse if USDCNH hits 7.00… It started the year 2020 at 6.9, “weakened” to 7.20 in May and never looked back. Yuan strengthened nearly 10% and ended the year at 6.50.

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Turkish Lira had been constantly in the headlines throughout the year, politically, rising US$ denominated funding costs, and after a 24% move 5.85-7.25 Jan-May and temporary consolidation, another 25% move 6.90-8.60 Jul-Nov, president Erdogan finally pulled the trigger and replaced the central bank governor and the finance minister, CRBT raised their key interest rates 3 times and in total +875bp to currently 17%. wow. Old school currency defending. But for now, USDTRY fell -14% to 7.30, and 10Y bond yields from 14.25% to initially 11.50% to currently 12.5%.

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South Africa got downgraded from rating agencies in the middle of year, but this chart shows the same pattern: panic sell-off into March, 10Y yields shot up from 8.75% to 13%, USDZAR rallied +40%. But, no credit risk, no default risk and investors coming back. Bond yields got hammered back to 8.75% and USDZAR is off -25% since March peak.

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COMMODITIES

ENERGIES

Oil one of <THE> headline stories nobody will ever forget. WTI April delivery settled at NEGATIVE -40$. No storage capacity, too much supply, Saudi-Russian failed talks while the world economy literally stood still in national lockdown. And who can ever forget the USO ETF debacle, where the fund management was forced to roll and stretched their delivery contracts from initially next 1-2 contracts into across one year and longer. That roll activity made them lose millions of barrels inventory. The yellow price is reality for retail investors thinking USO equals investing in physical oil. They don’t. They only have futures contracts and HAVE to roll. Big lesson learned for many including Chinese retail investors who lost billions US$.

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NatGas roller-coaster year. +30% Feb-May, then consolidation. Break out and another +24% rally. But had been one-way street since Oct, lost -33% until end of 2020.

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METALS

Dr.Copper, <the> apparent business cycle sentiment indicator: the world needs copper in your iPhone, your car, your house… it is +80% up since March bottom.

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Iron Ore: China’s economic rebound and/or short squeeze

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Gold: the initial -14% sell-off in March was due to hedge funds / retail margin calls on other instruments. But was seen as a perfect timing to bid on given the uncertain economic and pandemic outlook. Gold rallied +42% from 1450 in March to 2075 in Aug in a near parabolic move. And as so often, when the moon is the only target and everyone is long, there is no follow through and profit taking is in place, PLUS the occasional stop-losses. It has been consolidating since Aug peak. Possible forming a very large scale flag formation and close to a new technical break out.

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Hi-Ho-Silver: similar to Gold, stocks and oil market related margin calls led this one sell-off too from 19 in Feb down -38% to 11.80 in March. It then rallied parabolic +152% to 30 US$ in August before consolidating for 4 long months. Broke out and rallied again +20% to finish 2020 +48% overall.

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Every doom-and-gloom prophet is a gold-bug. If it is RiskON, and silver being more industrial-needed, the XAUXAG ratio collapsed of course.

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But one really has to see this spread ratio from the big picture perspective. It just HAD TO collapse as the world did not get destroyed. Gold/Silver ratio spiked to a new level nobody traded in decades.

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Copper/Gold spread : famous indicator for inflationary themes. While US10Y clearly “lagging” , perhaps one has to see this correlation with the current unprecedented situation. FED is on hold to raise rates, is on steroid to purchase US Treasuries, so naturally 10Y yields can’t really move that sharp, but the theme is there in general, just slower.

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Which naturally brings this theme into the sector: Copper producers vs Gold miners. While Copper/Gold ratio rallied +50% since March bottom, the miners ratio rallied +120%, especially since Oct (+63%).

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OTHERS SPECIAL

First highlight is Lumber: low interest rates, house building boom, shortage, US-CA trade issues, futures short squeeze, you name it. Mar/Apr lows to Aug +160%, massive correction of -40%, followed by roaring +100% Oct-Dec.

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Soybeans and Corn : initial rally in autumn driven by US limited rainfall while strong exports to China, but recent special boost driven partly by “potential harvest shortfall in South America tightening the global supply”, “dry conditions in Brazil and Argentina, the latter suspending corn exports until March to ensure adequate domestic supplies… Soybeans +56% since April, of which recently +16% in December alone.

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In comparison, Corn +45% since August, recent short squeeze +17% in December alone.

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With Crude oil and Natgas rallying +70/+80% off bottom, Lumber, Grains and others, the CRB Commodities Index overall took off, indicating inflationary pressure. Again, as said earlier, US yields <should> and <could> be much higher, but the other forces holding it down. But the general theme is there, just slower than usual.

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EQUITIES

Vola: RiskON/RiskOFF

Panic and Fear barometer, or just a RiskOn/Off, opportunities sentiment gauge. Intraday VIX never traded higher since being officially introduced. But risk sentiment quickly disappeared, and THAT is one of the key things for the FED: bring volatility down, calm down the market, flood with liquidity and secure funding. There has been a few typical short lived mini spikes (the US election being one of them), but overall since March it is “sell-VIX-rallies” or “buy-stock-dips”. Like it or not.

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And TLT/SPY spread is actually nothing else than the VIX fear-o-meter. RiskON/RiskOFF.

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US Market

Large caps S&P500: collapsed -36% one of the fastest sell-off in history, but with the “unprecedented” monetary and fiscal rescue packages to the “unprecedented” pandemic, rallied +70% off March lows. This was fun to watch between true perma-bears and perma-bulls. Finally a strong sell-off which perma bears had been waiting for years. Surely they all covered at the lows, but then re-shorted again, stopped out, re-shorted again, got stopped out etc. Narrative par excellence. Whereas perma bulls got it wrong with the massive sell-off and global lockdown but of course didn’t blink sitting at their screens in December. Oh the glory. My personal take was bearish when China CV19 hit the headlines, then Italy lockdown, but also very oversold in March. Plus FED & all other central banks action. So the rebound was always on the cards, the question was how does the economy really looks like in x months. Stronger rebound, then long term consolidation which indicated there is enough kitchen sinks being thrown out and market awaits a) vaccination progress and b) US election outcome.

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Global lockdown = WFH work from home was a theme nobody had on their radar in January 2020. But this was the key driver after all. Digital boost, more efficiency, reduction of useless and endless meetings and business travel. Nasdaq collapsed -31% into March, then rallied +91% into December. truly amazing.

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Small Caps, the most general economic sensitive market mirrored exactly that: sell-off -44% Feb-March. And then the slow climb back. +72% March-US election/Pfizer-BioNtech news week. Then another +22% or total +112% since March into peak December.

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Relative Value / Rotations in the US market

That rotation game: Nasdaq really took off RELATIVE to Russell in March, but wide-side-range traded for a long time with a Tech outperformance bias overall. Peaked in Sep and really started to get negative (rotation) momentum in the week with US election + vaccination headline news.

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Out of Momentum stocks into forgotten Value stocks. Although the spread itself lost momentum itself in the last couple of weeks, for the time being the spread is off the lows in Sep.

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Classic business cycle rotation or cyclical/defensive spread XLY/XLP: naturally spread tanked as algo-driven trades hunting safety net and out of growth. But as March bottomed everything in terms of RiskOFF, this spread rallied +55% off March into December and closed at year-high.

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Same can be said with the classic spread no2: XLI/XLU, even if you don’t trade this pair who gained +48% from March to December, it reflects the overall sentiment, the cycle for this moment. You absolutely can not be perma-bearish if you watch these kind of spreads roaring.

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As the economy deteriorates with potential loan losses on the banks’ balance sheet, naturally default risks go up (credit spreads widens), banks suffer, and e.g. KBE underperforms against the benchmark. KBE/SPY nose-dived -38% into March/April, but never really rebounded, in fact spread made new lows in May, in Sep. Only with vaccination headlines in Nov, banks started to outperform again vs S&P500. Coming from a low base, KBE/SPY is +28% since Sep lows. It also reflects yield curve steepener, possible reflationary themes.

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Energy sectors such as XLE, XOP or XES suffered tremendously early in the year, saw a rotational inflow recently as well. I could have shows XES vs SPY, but since Real Estate is one of the underperformer now, this is the chart below. The ratio collapsed -67% Jan-Mar. Latest momentum Oct-Dec shows +72%. As a pair.

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Special: TESLA

One can not write a 2020 review without Tesla. Oh my goodness. Yes, I too was once lured into the perma bear group, long time ago. And here again it shows a lot: haters hate, trolls troll. Without the 5:1 stock split in Aug, this stock actually trades now at 3.500 US$.

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and thus, made all perma-shorts bankrupt and Elon Musk the second richest person on earth. end of story. To put this into perspective, Musk is now worth more than Bill Gates and Zuckerberg combined in Jan 2020.

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Nikola owner Trevor Milton tried hard to be on the same page, using Nikola Tesla’s first name as Elon Musk did with the last name. NKLA/TSLA spread initially went through the roof – hello algos and friends. But outright (and logically the spread) turned sharply lower once SEC and DoJ started to investigate on securities fraud according to news headlines. Milton resigned.

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International / Relative Value

But as electric vehicles from a vast number of car and truck producers gain foothold worldwide, so is the demand for charging them. Lithium miners and battery producers ETF LIT literally “lit up”. Here is a chart LIT/ACWI the global stock market. Spread doubled from March to December +108%.

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Global Solar Energy vs global stock TAN/ACWI ETFs : +200% since March

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South Korea vs China EWY/FXI: Korea’s ETF is 42% tech-driven compared to 30% in FXI. Financials in the FXI ETF have a 43% weight and China’s financial industry carries a lot of more risk then years before. Korea is also the bellwether for global exports. Korean Won rallied +18% since March, whereas Yuan rallied +10% vs USD.

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US leading the world rat. As so often. Below chart with major LOCAL currency stock market indices, Europe remains the laggard.

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Global export champ Germany’s DAX at record high.

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Recap Global Markets Cross Assets

Momentum / Trend / Exhaustion scores

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YTD Performance

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March2020-to-date Performance

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Relative Value Spreads – Momentum / Trend / Exhaustion Scores

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Global Govt Yield Matrix & Performance

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Risk Gauges Matrix

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MACRO SENTIMENT

US

Business Confidence

…plunged and roared back. PMIs are like the English Marmite, some people hate it, some love it. It remains – even though there has been a slight lag in 2020 due to the “unprecedented” speed of CV19 spread and the governments RE-action = lockdowns – one of the global leading indicator in terms of sentiment.

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While the manufacturing sector is usually more business cycle sensitive, it was the services industry which suffered a lot more on the global lockdown. NMI Non-Manufacturing Index crashed and rebounded as quick.

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Consumer Confidence

Free fall from 2019 plateau, and currently near nowhere-land. Not depressing, not glorious either. Why ? Fiscal stimulus, QE for the people. Lot of temporary lay-offs, but personal stimulus cheques for short term financial surviving. But is has gone absolutely nowhere since March, let’s face it. Both, Conference Board and neither University of Michigan surveys.

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Unemployment Rate

Another “unprecedented” data. The spike from “lowest rate since 1960s” to near 15% in no time was gut-wrenching. But also temporary. It’s a shock more than a true long term business cycle turn. It’s already back to 6.7%. But this is only half the headline story.

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because the devil is in the details. The “regular state” jobless claims coming down fast = good news. But there are still 13.2mln jobless claims under the pandemic and emergency category. Overall, jobless claims are still near 20mln.

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US Yieldcurve 2s10s

“oh my god the yield curve inversion” trolls had their day in 2019. Recession was coming one way or another. Nobody saw CV19 pandemic coming in summer 2019, but that may just have been an accelerator. Fact is: 9 of the last 10 inversions predicted a recession. 2020 is another one ticked off, sadly. Since then, Bear-Steepening theme. Biggest difference though from before = where FED eff rate and 10Y were trading before. It takes a lot to re-steepen back to 250bp. And e.g. 2001-2003 and 2007-2009 had been BULL steepening driven by massive FED rate cuts.

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US Macro Matrix Heatmap

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EUROZONE

Business Confidence

Similar to so many other countries incl US ISM, the European version ESI Economic Sentiment has plunged and also sharply rebound. But is also way off previous highs. In fact , it re-weakened recently with new lockdowns in place across the continent.

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Consumer Confidence

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Unemployment Rate

In Europe employment laws are very different from e.g. the US. Furloughs and more in place and a real laying off principle is not common especially in e.g Germany. There they go from full-time employment to “Kurz-arbeiter”, you may want to google that yourself. Point is, right now in this business cycle the unemployment rate did not rise to levels seen before.

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German Yieldcurve 2s10s

The key yield curve barometer for Europe is Germany. And compared to the US curve, this one actually has not yet started to rebound. It’s still in recession-warning-territory. Why ? a) ongoing lockdown situation b) safety net bid for German long term Bunds despite trading deep negative yields.

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EuroZone Macro Matrix Heatmap

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COVID-19

Lockdown Fear-o-Meter

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…how it started…

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…how 2020 ended…

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Last but not least…

BITCOIN

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Now It’s All About The Vaccine Roll-Out, isn’t it ?

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…One More Thing…

I wish you and your family all the very best of health, success, a happy hand with trading or investing and a very happy new year 2021 !

Das war’s 🙂 , vielen Dank und good luck, Kai