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IS IT TIME TO HEDGE FOR A SELLOFF ACROSS “RISK ASSETS”?

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

 

IS IT TIME TO HEDGE FOR A SELLOFF ACROSS “RISK ASSETS”? - WORLD


Crude Mood

#GrowthStabilizing will continue to work until it doesn't. What can put an end to global growth? High oil prices. Over the last three months, we've seen Brent crude oil work its way to above $116 a barrel while the US dollar falls in strength. $130 a barrel oil and higher gas prices will slow down consumption which in turn slows growth. Keep your eye on oil over the next month; we'll see where this takes us.

 

Crude Mood - OIL


Retail Sales: Discretionary Lagging

Takeaway: Expectations are upbeat for SSS. That makes sense to us w Discount Stores and weather-sensitive apparel. Otherwise data is underwhelming.

Here’s a nugget for you in advance of Same Store Sales on Thursday. The spread in the growth rate between Discount stores and Department stores jumped by a full point in the final week of January to 3.3%. That marks only the fourth time since October 2011 where this spread was greater than 3 points. For the latest week, Discount Stores grew 2.6% per the Redbook Index, while Department Stores contracted by 0.7%.

 

Expectations for same store sales in January seem to be universally upbeat.  That makes sense to us on the Discount Store side, and perhaps in areas that were helped by the cold weather snap in January. But otherwise, the data is hardly overwhelming.

 

Johnson Redbook Index: Discount Store Sales vs. Department Stores

Retail Sales: Discretionary Lagging - red


Early Look

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Dovish Setup - ECB & BOE and EU Summit

There’s been much noise on the Euro in recent days, perhaps the loudest from France’s President, Francois Hollande, who said that “a monetary zone must have an exchange rate policy or else it ends up being subjected to a rate that does not fit with the true state of the economy.” How do you say currency manipulation in French? As the global currency wars heat up we note our currency outlook below going into this Thursday’s ECB and BOE policy rate decisions and the beginning of the European Union Summit.

  • ECB Meets: Thursday the ECB’s governing council convenes. We expect no change to the main interest rates. This position is grounded in recent data that is supportive of an “accommodative” hands off approach from Draghi – CPI came down 20bps to 2.0% Y/Y in JAN, exactly at the ECB’s targeted level; PMIs across the region looked broadly better, and importantly showed improvement in the Eurozone average and in Germany; and while the unemployment rate remains nominally high (10.7%), it saw no increase in the DEC reading. We think investors are beginning to price in much of the bad ‘crisis’ news, in that case what’s left in play is a long runway of slow, low growth and unexpected sovereign/banking flair-ups across the periphery.

We see a heavy immediate TERM resistance level in the EUR/USD around $1.36/7 and intermediate term TREND support at $1.31. 

 

As we continue to show in our research, CFTC data shows decidedly that market participants have anchored on Draghi’s all hands on deck approach to save the common currency via the introduction of the OMT bond purchasing program in early August 2012. While we don’t expect this momentum to erode materially, we do think that the cross will fade at our resistance level as the underlying data in the region is still coming off very low levels of improvement and a muted outlook.

 

Dovish Setup - ECB & BOE and EU Summit  - bb. eurusd

 

Dovish Setup - ECB & BOE and EU Summit  - bb.cftc

 

  • BOE Meets: Thursday the BOE convenes. The BOE is widely expected to keep its current policy stance, however former MPC member John Gieve suggested that he sees a “substantial chance” that the Bank will expand monetary policy further due to weakness in the economy. Remember that the final UK Q4 GDP came in lower than expectations on a Q/Q basis -0.3% (exp. -0.1%) and a Y/Y basis 0.0% (exp. +0.2%), which could encourage a step-up in action. However, with CPI currently running at 2.7% Y/Y (above the 2% target) the Bank must also be careful to not stoke more inflation pressures through monetary financing. Should we see even a hint of acceleration in asset purchases we’d expect perversely for the GBP/USD and GBP/EUR to run higher.

 

  • EU Summit: European politician meet this Thursday and Friday to agree on the EU's 2014-2020 budget, the so-called multi-annual financial framework (MFF). We’d suggest you don’t hold your breath that leaders will reach a unanimous agreement. Talks were suspended at the last summit on 22-23 November and will now pick up from that point. The agenda is to find a budget for growth, however this time, we’re following UK PM Cameron’s call for a referendum on the country staying or leaving the EU – this in and of itself should bring more disunity to the table. Herman van Rompuy has said that the budget should focus on jobs, innovation, and research and would like to see that spending on competitiveness and jobs represent more than a 50% increase from the previous budget period of 2007-2013. While we do not expect a unanimous decision, one crafted to throw heavy funding at job creating could put further support in the cross as the region slowly repairs growth.  As always, the devil is in the details.

Matthew Hedrick

Senior Analyst


Still Bullish: SP500 Levels, Refreshed

Takeaway: We’re not blindly buying on the overbought signals (1515), but we aren’t freaking out on controlled corrections either.

POSITIONS: 13 LONGS, 6 SHORTS @Hedgeye

 

Higher-lows and higher-highs as the economic data continues to stabilize. This morning’s employment component of the ISM non-manufacturing survey was the best print since 2006.

 

That’s bearish for Treasuries and bullish for stocks. Don’t fight the data.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1515
  2. Immediate-term TRADE support = 1490
  3. Intermediate-term TREND support = 1442

 

In other words, if you bought/covered yesterday’s close, you are smiling. We’re not blindly buying on the overbought signals (1515), but we aren’t freaking out on controlled corrections either.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Still Bullish: SP500 Levels, Refreshed - SPX


Golden Days Are Over?

As growth continues to stabilize in the United States, stocks are ripping to the upside while bonds and gold are getting creamed. Gold has taken quite a beating over the last six months as you can see in the chart below. Furthermore, with the US dollar starting to strengthen, gold will likely see further downside. Strong dollar = Strong America. The goldbugs can't always be right.

 

Golden Days Are Over? - GOLDUSD


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