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    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Takeaway: While it may “feel” like "risk assets" are poised to run out of steam here, the “data” suggests otherwise.

SUMMARY CONCLUSIONS:

  • All told, a positive outlook for global economic growth looks to overcome tired pessimism about US fiscal policy, Eurozone sovereign debt woes, Chinese growth scares and other 2012-style bear theses to continue underpinning “risk asset” prices – for now at least.
  • Specifically, our modeling of the key indicators and indices suggest there is further upside to be risk managed over the intermediate term.
  • We’re now at +2.6-3.4% for full-year 2013 global real GDP growth. That compares to roughly +2.1% in 2012 and the implied positive delta therein should continue to cushion risk asset prices – at least until all the good news is priced in.
  • A confirmed TRADE line breakdown on the SPX would be one of the key early signals of that occurring domestically.

Our five-person Macro Team has three former collegiate ice hockey players, a former collegiate football player and a former semi-professional body builder. Needless to say, we’re not the most sensitive bunch – particularly when it comes to our feelings.

In fact, I’d argue we’re not very good at interpreting our feelings at all – especially when making research calls and risk management decisions. That’s why we’ve grounded our two-pronged investment process in the embracement of uncertainty, in addition to constantly supplementing it with as much data as we can legally acquire.

Looking to the global macro universe, our fundamental research and quantitative risk management processes continue to suggest further upside to “risk asset” prices from here.

On the fundamental research front:

  1. Global growth continues to track higher: The median of our 39-index sample of PMI data from all of the key countries and economic blocks accelerated 1.3ppts MoM to 51.5 in JAN.
  2. Higher-highs: Manufacturing activity – which was once a core tenet of the global economic recovery – is now making higher-highs on a TTM basis per the JPM Global Manufacturing PMI.
  3. Higher-lows: 10Y-2Y Nominal Sovereign Yield Spreads – which we consider as reliable a proxy for growth expectations as any – have indeed stabilized and are, at worst, making higher-lows across the four largest economies (US, Germany, China and Japan).
  4. Expectations suggest limited upside for positive economic surprises: Looking to the relationship between Citigroup’s G10 and EM Economic Surprise indices and global equity markets, the MSCI World Equity Index has tended to register a cycle-peak 1-2 months after the G10 index registers its cycle-peak. If this pattern holds, that puts us within striking distance of a short-cycle market top.
  5. But the post-crisis countercyclical buffer suggests more room to run: We consider any demonstrable delta in global energy prices as the closest thing to Fed tightening in the post-crisis era of ZIRP. The latest run-up in global energy prices, or lack thereof, suggests room for more upside with respect to global growth. The MSCI World Equity Index has tended to register a cycle-peak when the 3M % change in the front-month Brent Crude Oil future registers +20% or more. We’re currently only at 8.6% on this metric, suggesting global energy prices must continue higher (partly because the comps get harder from here) for us to anticipate a material drag on global growth and “risk asset” prices.

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On the quantitative risk management front:

  1. Energy prices are still a headwind: We’d be lying if we said we were not at all worried about the impact of global energy prices and the potential for $110-plus Brent Crude Oil weighing on global consumption and fixed capital formation. Brent prices are indeed bullish TRADE and TAIL on our quantitative factoring, so at a bare minimum, it’s tough to anticipate meaningful downside without some currently unforeseen catalyst.
  2. USD strength could be just that: While the burning yen (13.6% of the DXY basket) has insulated the dollar’s 3M slide to some degree, the melt-up in the euro (57.6% of the DXY basket) has really weighed on the USD in recent weeks. We continue to anticipate that the DXY will make a series of higher-lows with respect to the long-term TAIL on the strength of a continued recovery in US housing and the US labor market. If, however, the DXY doesn’t hold its TREND line of support at 79.44, the aforementioned research view will continue to be subject to a great deal of Duration Mismatch.
  3. The flows continue to support “risk assets”: Bearish TRADE and TREND from a price perspective, both US Treasury bonds and Gold have broken down on our quantitative factoring. The former demonstrably so; the latter – which continues to be supported by more religion than research – far less so. Gold is currently testing its TAIL line of resistance ($1,674) and a confirmation of the recent breakdown would continue to supplement our fund flows argument.

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All told, a positive outlook for global economic growth looks to overcome tired pessimism about US fiscal policy, Eurozone sovereign debt woes, Chinese growth scares and other 2012-style bear theses to continue underpinning “risk asset” prices – for now at least. Specifically, our modeling of the key indicators and indices suggest there is further upside to be risk managed over the intermediate term.

Our updated World GIP outlook is included in the chart below. We’re now at +2.6-3.4% for full-year 2013 global real GDP growth. That compares to roughly +2.1% in 2012 and the implied positive delta therein should continue to cushion risk asset prices – at least until all the good news is priced in. A confirmed TRADE line breakdown on the SPX would be one of the key early signals of that occurring domestically.

Darius Dale

Senior Analyst

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