TODAY’S S&P 500 SET-UP – June 10, 2013
As we look at today's setup for the S&P 500, the range is 45 points or 1.18% downside to 1624 and 1.56% upside to 1669.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
“Books can lie, but places never do.”
I love that quote. Jack Weatherford uses it in the Introduction to this epic book I am still reading – Genghis Kahn and The Making of The Modern World. Politicians and market pundits can lie too, but markets are always scoring the truth.
Some will disagree and say that markets are often wrong. Agreed – if the market goes your way on the timeline that you outlined prior to taking your position, that is. Being positioned for what the market currently accepts as truth is the name of the game.
If you could be right every day, you would be. Very few will disagree with me on that.
Back to the Global Macro Grind…
Last week’s employment data continued to drive home a very simple, but trending, score in 2013 – US employment and consumption growth is accelerating. This shouldn’t have been a surprise by the time you saw the sequential improvement in the payroll data on Friday. Our preferred leading indicator (non-seasonally adjusted rolling jobless claims) has been trending bullish for 6 months.
Every 3 months, we update our Top 3 Global Macro Themes @Hedgeye. This quarter I was definitely nervous about one of them. Making a call that US growth could go from stabilizing to accelerating was more of a question to us than it was a definitive answer. Throughout Q213 however, US employment, housing, and consumption data has improved, impressively.
To review - our Macro Themes for Q2 2013 are:
1. US #GrowthAccelerating
Since the fulcrum factor in our trending themes remains the US Dollar, last week’s abrupt selloff in the US Dollar versus the Japanese Yen definitely mattered. An immediate-term TRADE does not an intermediate-term TREND make though, so this morning’s -1.25% reversal in that move to #StrongDollar’s benefit has me smiling again.
Alongside a big bounce in #StrongDollar versus Burning Yen, this is what you get pre-open:
If you are betting on growth, you’ve recognized that the market’s version of the truth is currently paying people who have embraced the non-consensus bullish case that #StrongDollar is a pro-growth signal. You can see that in the following trending correlations:
Moreover, if you want to dig into the multi-factor, multi-duration update, these correlations have actually strengthened across multiple factors in the last month. In addition to rising US Treasury yields, here are some more pro-growth signals to consider:
Again, the score in the book may very well feel like a lie to people who are still bearish on growth, but where this market has scored the game for 2013 YTD isn’t. I’m not a fan of investing alongside what people are “feeling” anyway.
Another score that is developing quickly here is that a #StrongDollar eventually drives underperformance in Emerging Markets. We call this Theme #EmergingOutflows and it’s worth scoring this morning as well:
Investors we speak with on #EmergingOutflows fall into 1 of 3 camps:
We’re obviously in the 3rd camp. Looking at this week’s contra-indicator camps (weekly futures and options contracts in the CFTC data) we’re still seeing Camp 1 A) buy Gold (weekly net long position +19% wk-over-wk) and B) short SPY (there’s still a net short position in SPY right now of -3,061 non-commercial contracts).
I’m not saying we’re going to nail the macro call in perpetuity. All I’m saying is that last week was one of the top 6 times in the last 6 months that you’ve had to re-load on the long side where it’s actually working. Bullish Places are as bullish does. And, globally, they are getting harder and harder to find.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1, $100.27-105.25, $81.31-82.96, 96.05-99.98, 2.07-2.22%, 13.77-15.87, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
Takeaway: The XLF continues to rise in the face of broad deterioration in company and sovereign credit swaps. High Yield, meanwhile, blasts off.
* High Yield – High Yield rates rose 36.5 bps last week, ending the week at 6.11% versus 5.75% the prior week. This is disconcerting, as we've historically observed fairly tight correlations between U.S. Financials, particularly large caps, and junk yields. The current divergence is an outlier vs. history.
* European Financial CDS - European financials swaps widened considerably, increasing by a median of 18 bps. The U.K., Spanish and Italian banks widened sharply. Italian banks, in particular, were materially wider.
* American Financial CDS - Morgan Stanley was a significant outlier last week, widening by 15 bps to 133 bps. The rest of the large caps were narrowly tighter or slightly wider. It was another week of spreads backing up for mortgage insurers and bond guarantors.
* XLF Macro Quantitative Setup – More risk than reward in the short-term. Our Macro team’s quantitative setup in the XLF shows 1.8% upside to TRADE resistance and 3.0% downside to TRADE support.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 13 improved / 6 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Negative / 3 of 13 improved / 6 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged
1. American Financial CDS - Morgan Stanley was a significant outlier last week, widening by 15 bps to 133 bps. The rest of the large caps were narrowly tighter or slightly wider. It was another week of spreads backing up for mortgage insurers and bond guarantors.
Tightened the most WoW: MET, C, JPM
Widened the most WoW: RDN, TRV, MS
Tightened the most WoW: MBI, AGO, UNM
Widened the most MoM: SLM, AXP, RDN
2. European Financial CDS - European financials swaps widened considerably, increasing by a median of 18 bps. The U.K., Spanish and Italian banks widened sharply. Italian banks, in particular, were materially wider.
3. Asian Financial CDS - Indian banks were notably wider last week, with State Bank of India widening by 17 bps and IDB Bank of India wider by 20 bps. Chinese banks were also wider, by an average of 7 bps. In Japan, swaps were mixed, with three advancers, two decliners and one unchanged.
4. Sovereign CDS – Sovereign swaps were wider around the globe with the sole exception of Germany, which tightened 3 bps to 24 bps., and now trades inside the U.S. by 4 bps. The biggest movers were Portugal, Spain and Ireland at +16, +12 and +8 bps, respectively.
5. High Yield (YTM) Monitor – High Yield rates rose 36.5 bps last week, ending the week at 6.11% versus 5.75% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -6.3 points last week, ending at 1793.16.
7. TED Spread Monitor – The TED spread fell 1.5 basis points last week, ending the week at 23.2 bps this week versus last week’s print of 24.7 bps.
8. Journal of Commerce Commodity Price Index – The JOC index rose 0.4 points, ending the week at 3.6 versus 3.2 the prior week.
9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis.
11. Markit MCDX Index Monitor – Last week spreads widened 9 bps, ending the week at 75.5 bps versus 66.3 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.
12. Chinese Steel – Steel prices in China fell 1.4% last week, or 47 yuan/ton, to 3422 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 185 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.8% upside to TRADE resistance and 3.0% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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