This note was originally published at 8am on February 08, 2013 for Hedgeye subscribers.
“I hated every minute of training, but I said, ‘Don’t quit. Suffer now and live the rest of your life as a champion.’”
Winning is never easy. It requires early mornings and working hard. That is true regardless of what your field of competition. It may be producing research, it may be investing, it may be athletics, and so on.
Last night I joined the men of Ivy League Football for a few cocktails post the dinner they hold every two years. Now I’m going to admit it, I definitely would have preferred to continue to sleep in this morning (so, yes, perhaps I had too many cocktails), but the only type of winning I understand is that which requires getting up and grinding. So here I am.
As usual when I get up, I’m greeted by a few emails from my colleague Keith McCullough regarding the global macro news and data flow. The most notable one this morning related to the Stoxx 50, which is the “blue chip” index for Europe. (Think Dow Jones with a few more names.) His email simply stated, “The Stoxx 50 snapped.”
For those of you that have been subscribers for awhile, you know that the price of securities and indices in our model are critical to determining future outlook. When something snaps, that is not a good thing for those investors that are long of that market. So, yes, as it relates to Europe, oh snap indeed.
Should any of us be surprised that the blue chip European index has snapped this week? Well, not really given that the European Union leaders were all convening in Brussels and that T.V. cameras were omnipresent. In fact, according to the news releases this morning, they actually pulled an all-nighter last night. I was out late with the boys from the grid iron, but I certainly didn’t pull an all-nighter, so kudos to them.
That said, the fundamental problem with politicians getting too much air time is that it is usually not great for equity returns. Or, really, any asset price returns. The funny thing about policy and policy makers is that they actually do influence markets and sometimes to a greater degree than they realize. The perfect recent example of this phenomenon is the Japanese Finance Minister, Taro Aso.
Mr. Aso has been quite explicit since coming into office that he believes Japan needs to devalue and create inflation. That is obviously all fine and good, until the market corrects more than said policy maker hopes. As it relates to Mr. Aso and the Yen, it seems that has happened this morning. According to this Aso:
“It seems that the government's policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78.”
Markets are funny critters, aren’t they? They often do more than we expect. (And sometimes less for that matter.)
This morning, there is a fair amount of pin action. As Keith also highlighted this morning:
“Plenty of cracks in my country level TRADE and TREND signals (Equities) now – tops are processes, not pts:
1. FX WAR – Draghi is now trying to do precisely the opposite of what helped Germany recover, jawbone the Euro back down; overlay the slope of German economic recovery w/ the Euro in the last 3 months and you will see the pt western academics don’t get – currency has a POSITIVE correlation to growth expectations.
2. INDIA – India’s Sensex joins the KOSPI (and Italy, France, Spain, Brazil) as the latest Equity market to snap my immediate-term TRADE line of 19,839 support. In isolation, I wouldn’t bother w/ a signal like this – but when the big country indices start to pile up, I move. Took down our Global Equity asset allocation yesterday.
3. 10YR - the long bond looks almost identical to the VIX on price/volume/volatility factors – both signaled their first higher-lows of the yr in the last 48hrs. The upside down of that now makes last week’s closing high for the 10yr of 2.01% immediate-term TRADE resistance. Brent Oil > $115 is a headwind to global growth. Period.”
Incidentally, if you are not on the Direct from KM email list, ping firstname.lastname@example.org and let them know you want to be upgraded.
As for the points above, the most noteworthy callout from my seat is that the Indian equity market has also snapped. When equity indices start to snap, it is time to reduce equity exposure.
Despite some of these major indices snapping, not all is negative this morning. In fact, China reported some solid economic data. Specifically, Chinese trade data for January beat expectations as exports rose +25% versus estimates of +17.5% and imports were up +28.8% versus estimates of +23.5%. Those are darn good numbers, even if it is the year of the snake!
I’m going to cut it a little short this morning as I’m sure many of you are busy prepping for the snow storm. As always, let us know if you need help with anything.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1651-1684, $115.78-118.03, $79.79-80.29, $1.33-1.35, 92.20-94.29, 1.92-2.01%, and 1492-1516, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research