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[Crash]: A Look At Global Stocks

Takeaway: "The Old Wall will blame Brexit, but stocks in London are only -0.39% - blame #GrowthSlowing."

[Crash]: A Look At Global Stocks - World Market No 12.16.14

 

Global Equity markets are getting crushed this morning.

 

  1. Japan, Nikkei (-3.5%)
  2. China, Shanghai Comp (-3.2%)
  3. Germany, DAX (-1.3%)
  4. Italy, FTSE MIB (-2.3%)

 

The common refrain cited by mainstream media this morning is Brexit risk ... but that's a mirage. "The Old Wall will blame Brexit, but stocks in London are only -0.39% - blame #GrowthSlowing," Hedgeye CEO Keith McCullough wrote this morning.

 

Here's more analysis from McCullough in a note sent to subscribers this morning:

 

"... Not that this would matter, but Japan, China, Germany, Italy, etc. are all in crash mode from 2015 cycle highs – Nikkei hammered -3.5% last night (-23% from July 2015); Shanghai -3.2% overnight (-45% y/y); Italy -2.4% (-30% from July 2015) #GrowthSlowing."

 

Take a look at Japan...

 

 

... And China

 

 

Meanwhile, over in Europe...

 

Italian equities lead the losers:

 

 

 

... German equities are still crashing:

 

 

While global equity markets get eviserated, our favorite Macro positions like Long Bonds (TLT) and Gold (GLD) are winning. McCullough continues:

 

"Our call for an all-time low this year in the UST 10yr is playing out and the Long Bond remains our Best (Long) Macro Idea – 1.62% 10yr in the USA, taking it to -65bps YTD; Germany 10yr testing negative at 0.01%, Swiss 10s new lows at -0.51%."

 

 

 

ARE YOU LONG #GROWTHSLOWING?


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 6 13

 

Daily Market Data Dump: Monday - sector performance 6 13

 

Daily Market Data Dump: Monday - volume 6 13

 

Daily Market Data Dump: Monday - rates and spreads 6 13

 

Daily Market Data Dump: Monday - currencies 6 13


MONDAY MORNING RISK MONITOR | CONTENTION

Takeaway: Mixed risk measures highlight contention in the market as investors look to this week's FOMC announcement and the June 23 Brexit vote.

MONDAY MORNING RISK MONITOR | CONTENTION - RM11

 

Key Takeaway:

Mixed risk measures highlight the contention and uncertainty in the market as the June 23 Brexit vote approaches and investors look to the FOMC announcement in the wake of poor U.S. labor data; risk measures on the intermediate and longer term are equally negative and positive, and short-term measures are only slightly more negative. In particular, U.S. financials, European financials, and Sovereign CDS all widened significantly last week while the high yield YTM fell by -13 bps to 7.11% and the price of Chinese steel rose for the first week in seven, by +3.0% to 2,336.

 

Current Ideas: 


MONDAY MORNING RISK MONITOR | CONTENTION - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 13 improved / 4 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

MONDAY MORNING RISK MONITOR | CONTENTION - RM15

 

 

1. U.S. Financial CDS – Swaps widened for 12 out of 13 domestic financial institutions as markets continued to react to developing weakness in U.S. labor data.

Widened the least/ tightened the most WoW: COF, ALL, SLM
Widened the most WoW: WFC, MET, PRU
Tightened the most WoW: AIG, HIG, LNC
Widened the most MoM: TRV, AGO, XL

MONDAY MORNING RISK MONITOR | CONTENTION - RM1

 

2. European Financial CDS – Financials swaps mostly widened in Europe last week as the June 23 Brexit vote approaches. Conversely, Greek bank swaps stood out, tightening between -53 and -190 bps.

 

MONDAY MORNING RISK MONITOR | CONTENTION - RM2

 

3. Asian Financial CDS – Bank CDS were mixed in Asia last week. The median CDS tightened by -1 bps to 128.

MONDAY MORNING RISK MONITOR | CONTENTION - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. Italy and Portugal led the move, widening by 11 bps and 12 bps to 141 and 283 respectively.

MONDAY MORNING RISK MONITOR | CONTENTION - RM18

 

MONDAY MORNING RISK MONITOR | CONTENTION - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps were mixed last week, and the median was unchanged at 180.

MONDAY MORNING RISK MONITOR | CONTENTION - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 13 bps last week, ending the week at 7.11% versus 7.24% the prior week.

MONDAY MORNING RISK MONITOR | CONTENTION - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 5.0 points last week, ending at 1910.

MONDAY MORNING RISK MONITOR | CONTENTION - RM6

8. TED Spread Monitor  – The TED spread rose 1 basis point last week, ending the week at 41 bps this week versus last week’s print of 40 bps.

MONDAY MORNING RISK MONITOR | CONTENTION - RM7

9. CRB Commodity Price Index – The CRB index rose 3.2%, ending the week at 193 versus 187 the prior week. As compared with the prior month, commodity prices have increased 5.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | CONTENTION - RM8

10. Euribor-OIS Spread – 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. The Euribor-OIS spread was unchanged at 9 bps.

MONDAY MORNING RISK MONITOR | CONTENTION - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged last week at 2.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | CONTENTION - RM10

12. Chinese Steel – Steel prices in China rose 3.0% last week, or 69 yuan/ton, to 2336 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | CONTENTION - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

MONDAY MORNING RISK MONITOR | CONTENTION - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 148.7 trillion RMB as of April 30, 2016 (data released 5/13/2016), which is up +15.8 trillion RMB or +11.9% year over year. Month-over-month, credit is up +656 billion RMB or +0.4%. Note: this data is only updated monthly. 

MONDAY MORNING RISK MONITOR | CONTENTION - RM20

15. 2-10 Spread – Last week the 2-10 spread tightened to 91 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | CONTENTION - RM13

16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 2 bps to 39 bps.

MONDAY MORNING RISK MONITOR | CONTENTION - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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Dollar Up, Rates Down

Client Talking Points

USD

US Dollar Index +0.6% last week and seeing following through vs. the Pound (-1% this am to 1.41 vs USD) so we're sure the Old Wall will blame Brexit, or China, or anything but what was an awful US jobs report and more Late Cycle #GrowthSlowing data.

UST 10YR

Our call for an all-time low this year in the UST 10YR is playing out and the Long Bond remains our Best (Long) Macro Idea – 1.62% 10yr in the USA, taking it to -65bps YTD; Germany 10yr testing negative at 0.01%, Swiss 10s new lows at -0.51%.

Equities

Not that this would matter, but Japan, China, Germany, Italy, etc. are all in crash mode from 2015 cycle highs – Nikkei hammered -3.5% last night (-23% from July 2015); Shanghai -3.2% overnight (-45% y/y); Italy -2.4% (-30% from July 2015) #GrowthSlowing.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/12/16 69% 0% 0% 5% 16% 10%
6/13/16 66% 0% 0% 6% 18% 10%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/12/16 69% 0% 0% 15% 48% 30%
6/13/16 66% 0% 0% 18% 55% 30%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
TLT

No matter what side of the reflation/deflation trade you’re on, the growth in global demand continues to decelerate on a trending basis. The debate is no longer whether or not growth is slowing. The real debate centers on the policy response and the market reaction to that policy response. While that question presents us with “open the envelope” risk, #GrowthSlowing will continue to be the bull catalyst for U.S. Treasuries whatever the policy response as the slow march to zero yields globally goes on. 

GLD

To sum things up, stay away from the guessing game and stick to what is empirically evident. A stronger USD over the longer term is a probable scenario in our book. We expect the Fed, and all central banks for that matter, will try to combat deflation. That said, global currencies all burning at the same time makes a compelling case for GLD, as gold knows no currency. You can sell it in local currency all over the world. Scary but true.

MCD

There have been rumblings in the news that McDonald's (MCD) 2Q comps have slowed due to the temporary replacement of the 2 for $5 value platform for Monopoly. This has clearly been reflected in the stock as of late, as MCD has underperformed the S&P 500 over the last month.

 

Despite this near term headwind, we still strongly believe in the long-term story for MCD and remain confident that once they get their value platform right nationally, they will be just fine. In the short to intermediate term, as we wait for a solidified value platform, this recent underperformance represents a great buying opportunity. We remain LONG MCD.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: What's Winning (& Losing) As US Growth Slows app.hedgeye.com/insights/51610… via @KeithMcCullough $XLU $XLF $GLD $XLY

@Hedgeye

QUOTE OF THE DAY

 “Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.”

-Thomas Edison

STAT OF THE DAY

Ryan Klesko hit 278 homeruns in his 16 year MLB career.


CHART OF THE DAY: What's Winning (& Losing) As U.S. Growth Slows

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... If you’re long things that are crushing it when growth slows (and bond yields fall), congrats:

 

  1. Utilities (XLU) added another +1.0% absolute return last week taking them to +16.8% YTD
  2. Gold rose another +2.8% last week to +20.2% YTD

 

On the other side of that, classic #LateCycle consumption Sector Styles in the USA lagged:

 

  1. Financials (XLF) lost another -1.5% on the week to -2.8% YTD
  2. Consumer Discretionary (XLY) fell back into the red last week, closing -0.8% to -0.8% YTD"

 

CHART OF THE DAY: What's Winning (& Losing) As U.S. Growth Slows - 06.13.16 Chart


Loving The Game

“You’ve got to love what you are doing.”

-Gordie Howe

 

On behalf of everyone @Hedgeye, I’d like to express our deepest sympathies to the families who have been affected by this horrible shooting in Orlando over the weekend. Sadly, terror is the dark side of how a small percentage of people think about life.

 

The good news is that there is much more light in the world than there is darkness. While the hockey world lost one of the greatest ambassadors of the game this weekend, the farm boy from Floral, Saskatchewan left us all feeling a lot of love.

 

Do you love what you are doing this morning? I do. And if you can find that passion on a frozen pond or at your desk, do more and more of that. As Gordie Howe went on to say, “if you love it, you can overcome any handicap… and continue to play for a long time.”

 

Loving The Game - gordie howe

 

Back to the Global Macro Grind

 

In addition to enjoying time with my family and friends, I spent this weekend doing the other thing I love – coaching kids hockey. We were up at the Coast To Coast tournament in Bloomington, Minnesota. Hockey is a hard game, but wow is it easy to love.

 

I don’t love that US growth is slowing. But I do love the game within the game of being the best independent research firm we can be in making a call that was both differentiated and right.

 

As everyone in this game knows, the direction of long-term bond yields reflect intermediate-to-long-term growth expectations, and they have been falling alongside those slower-for-longer expectations for … well, a long time.

 

Dollar Up, Rates Down? Yep. That Quad4 #DeflationRisk showed up again last week:

 

  1. USD Index +0.6% on the week > long-term Hedgeye TAIL support of 92.57
  2. UST 2yr Yield down another -4 basis points on the week to 0.73% (down -32 bps YTD)
  3. UST 10yr Yield down another 6 basis points on the week to 1.64% (down -63 bps YTD)

 

And so did cross asset class volatility:

 

  1. US Equity Volatility (front month VIX) ramped +26.4% on the week to 17.02
  2. Oil Volatility (front month OVX) popped +14.8% on the week to 39.95

 

Since it’s critical to contextualize short-term moves within long-term mean reversion risks, it’s critical to understand what’s been driving this on/off volatility switch all along: Fed growth, inflation, and policy forecasts vs. market expectations.

 

If stock, commodity, and bond markets weren’t expecting the Fed’s forecast to “probably” raise rates (i.e. another policy mistake, tightening into a slow-down) to be wrong, why would they be driving long-term US interest rates to all-time lows?

 

Don’t forget that long-term cross-asset class volatility put in an all-time low in the summer of 2014. Corporate profits peaked in the 2nd half of 2014. Some corporates then issued reams of debt expecting their profits to be perpetual. That’s a big problem now.

 

Especially if you issued debt in Dollars… and don’t get paid in Dollars…

 

The combination of a rising Dollar and falling interest rates is also very bearish for banks who issued those debts. All-time lows in bond yields are going to crush bank earnings. If you think “earnings have bottomed”, you better state them “Ex-Financials!”

 

If you’re long things that are crushing it when growth slows (and bond yields fall), congrats:

 

  1. Utilities (XLU) added another +1.0% absolute return last week taking them to +16.8% YTD
  2. Gold rose another +2.8% last week to +20.2% YTD

 

On the other side of that, classic #LateCycle consumption Sector Styles in the USA lagged:

 

  1. Financials (XLF) lost another -1.5% on the week to -2.8% YTD
  2. Consumer Discretionary (XLY) fell back into the red last week, closing -0.8% to -0.8% YTD

 

Those two sectors and the Nasdaq (also late cycle) are the last places I want people to have their hard earned money right now. If you get #GrowthSlowing, your main debate should be whether to be long REFLATION or DEFLATION. They are different things.

 

Yes, it’s been hard to maintain a bearish view on both Global and US growth and not chase the bear market bounce in something that’s killed people (in real return terms) like Energy Stocks.

 

Yes, it’ll also be hard not to buy Energy Stocks (XLE +11.7% YTD) on the next pullback to immediate-term TRADE oversold as my expectation is that the Fed does everything it can do to devalue the Dollar to another higher-low.

 

Both this game and life are hard – that’s why they’re easy to love too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.60-1.75%

SPX 2085-2106

NASDAQ 4

VIX 14.03-17.37
USD 93.01-96.08

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Loving The Game - 06.13.16 Chart


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