“That is why, no matter how desperate the predicament, I’m always straightening my derby hat and fixing my tie – even though I have just landed on my head.”
After making up a 7.0 GDP number in Q2, the Chinese have quite publicly landed on their head. And, as you’re all accustomed to by now, the only ideological central-plan for that in this day and age is a currency devaluation.
Must “stimulate” exports, right? Never mind what might happen to all your customers (Singapore, Taiwan, Indonesia – stock markets all -4-6% in the last month) and/or local consumers (less purchasing power) – it’s for The People, right?
Definitely. For sure. Now that most of the majors (Japan, Europe and China) have answered the bell on a global cyclical slowdown meeting their secular (demographic) ones, the only one left to devalue (again) is the USA.
Back to the Global Macro Grind…
If Abenomics (BOJ) + Draghi’s (ECB) “Whatever It Takes” (and almost 600 rate cuts around the world in response to growth and inflation slowing) = US Dollar’s biggest 6-12 month ramp in modern history, what’s China devaluing by 2% going to do?
I don’t know. Do you?
This is where embracing the uncertainty of it all comes into the #process. While the absolute devaluation (to 6.2298 Yuan vs. 6.1192 Yuan) is small (2%), the non-linearity of the move is probably what matters here. The Chinese are panicking.
In addition to the FX moves overnight, this is what Mr. Macro Market told us:
- Shanghai Composite down, literally, 1 basis point (-0.01%) on the “news” – nice job dudes
- Indonesia and Singapore stock markets were -2.7% and -1.4% on the news, respectively
- KOSPI and Taiwan saw their stock markets decline (again) and are -3.6% and -5.8% month-over-month
- Oil (WTI) failing to have more than a 1-day bounce, -0.5% to $44.73 (no support to $42.62)
- Gold sees some follow through, +0.8% to the top end of my $1080-1118 risk range
Global Rates backed off on the implicitly bearish #ChinaSlowing news too:
- US 2yr Treasury Yield backed off the 0.75% level of resistance it has failed at, every time, in 2015
- US 10yr Treasury Yield back down to 2.17% and remains bearish TREND @Hedgeye
- German 10yr Bund Yield failed at its long-term TAIL risk level of 0.76% and has fallen to 0.66% last
- Swiss 10yr Bond Yield has retraced all the way back down to -0.17%
- Japanese 10yr Government Bond Yield of 0.39% is -4 and -12 bps lower than where it was 1mth and 1yr ago
In other words, the most fundamental reality in Global Macro today remains the same as it was yesterday. As both Global Growth and “reflation” slows, #Deflation linked assets get cheaper and slow-growth ones (Long Bonds) get more expensive.
As you can see in today’s Chart of The Day (Long-term chart of Global Yields) China telling the “truth” (sort of) by their actions only confirms what long-term investors have had right on growth and inflation for a long time now – the slowing is secular.
As for the US stock market, don’t forget that no “surprise” (non-linear) central-planning move happens in a vacuum. Since yesterday was a “reflation” day, today is most likely going to be a deflation day. What I mean by that is:
- Energy Stocks (XLE) bounced +3.2% on Down Dollar yesterday, but remain bearish TREND @Hedgeye
- Utilities (XLU) corrected -0.4% on Up Bond Yields yesterday, but remain bullish TREND @Hedgeye
That gave the SP500 its 4th up day in the last 15, but it came on crashing US Equity Volume (Total US Equity Market Volume, including dark pool, was -24% vs. its 1yr average).
Since I covered every short position in Real-Time Alerts on Friday (they all signaled immediate-term oversold), I saw plenty of short selling opportunities yesterday. Given the China news, my 2 favorite SELL signals yesterday were CAT and Industrials (XLI).
If you want to make money in this market, I say you keep moving out there. When someone asked me yesterday what I’ve been doing differently in Real-Time Alerts (24 booked gains in a row), I said I was just seeing the big picture clearly.
As most of you know, 16 years of risk managing markets doesn’t always go this smoothly. But when it does, and we’re not consensus, it sure beats landing on my head.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.13-2.25%
Oil (WTI) 42.62-46.19
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer