This note was originally published
at 8am on May 26, 2015 for Hedgeye subscribers.
“I started to establish the present and the present moved on.”
I love spending long weekends with my family. I hope you had a great one with yours. Welcome back.
This weekend I took some time to review what I’ve organized as the un-read section of my library and I found a book that I’ve been wanting to read for a long time – Wallace Stegner’s 1972 Pulitzer Prize Winner, Angle of Repose.
In some ways I find Stegner to be like Hemingway. He’s of the same era; he writes from a historian’s perspective; and he keeps his short stories within a story concise and to the point. These are all writing attributes I aspire to achieve someday. Until then, I evolve.
Back to the Global Macro Grind…
When considering the non-linearity of Global Macro markets, isn’t Stegner’s aforementioned quote the truth? Just as Bloomberg writes a headline about FX “volatility expected to reverse direction”, it breaks out this morning. Again, welcome back.
Before I get into the #behavioral side of this foreign currency move (Japanese Yen -1.1% this a.m. to fresh YTD lows), it’s always critical to review the #history of market moves, so that we can attempt to establish context:
- In “front-loading” QE, Eurocrats devalued the Euro by -3.8% last week, taking it down -9% vs USD YTD
- After 6 weeks of pervasive weakness, the US Dollar Index spiked on that, closing the week +3.1% at +6.4% YTD
- The Japanese Yen, which had been doing nothing for months, finally broke down, dropping -1.8% on the week
That’s why another drop in the Yen this morning matters. Not only did it break immediate-term TRADE support last week, fortifying our long-term bearish TAIL risk view, but now it’s testing a break-down to lower-lows, -2.5% YTD.
Now, since I’m bearish on the US Dollar into this week’s GDP report (Friday) and next week’s jobs report for June (then the Fed meeting on June 17th), these Euro and Yen moves are going to present opportunities on the long side of commodities.
If you didn’t know that the USD impacts commodity #deflations and reflations (or whatever consensus is whining about right now on “inflation” coming back at sub $60 Oil and 1.68% 5yr US break-evens), now you know.
With USD having a -0.90 inverse correlation to the CRB Index (30-day duration) here’s what everything Commodities did last week:
- CRB Commodities Index -2.5% = -1.9% YTD
- Oil (WTI) -1.4% to $59.72 = +6.2% YTD
- Gold -1.7% to $1204 = +1.6% YTD
- Copper -3.9% to $2.81 = -0.5%
- Energy Stocks (XLE) -0.6% = +1.3% YTD
Contextualized this way, the present (being YTD) is less than 6 months old. If you pull back your time-series #history to 1 year, obviously most of these “inflation” barometers have plummeted.
Five year breakevens is a fair way to consider inflation expectations, and while it’s true that those are +11 basis points for the current quarter, they are -32 basis points year-over-year. Newsflash: the Fed is not going to “raise rates” on that.
Longer-term, what does the world want – a stronger or weaker Dollar?
- If you’re a European stock market bull, you want #StrongDollar, Burning Euro
- If you’re an Emerging Markets bull, you want #WeakDollar, Recovering EM Currencies
- If you’re a non-Wall St American, you want a #StrongDollar, Rising Purchasing Power
That’s what macro markets reminded you of on last week’s #StrongDollar move:
- European Stocks (EuroStoxx 600 and German DAX) +2.8% and +3.2% to +19% and +20.5% YTD, respectively
- EM Latin American Stocks (MSCI Index) -5.5% to -4.2% YTD
- Russell 2000 +0.7% to +3.9% YTD with the almighty Dow DOWN -0.2% on the week
Yep, the Russell is basically a US domestic revenue index whereas both the Dow and SP500 are increasingly proxies for international earnings. That’s why the Russell rocks during #StrongDollar periods (see our 2013 US #GrowthAccelerating theme for details).
That’s also why the US Sector Style (equities) outperformance last week was very much what it was prior to the recent US Dollar correction. US Consumer Discretionary (XLY) loves #StrongDollar whereas the global Industrials (XLI) loathe it.
Love it or loathe it, US Dollar #history has been established. And it’s my job to write about its policy risks for both the short and long-term. While it’s true that, in the long-run, Keynes is right (we’ll all be “dead”), the present moves on.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.97-2.24%
Oil (WTI) 57.31-61.68
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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