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A Closer Look At Brexit, European Equities, & Pound Vs. USD

A Closer Look At Brexit, European Equities, & Pound Vs. USD - pound 6 20

 

"Thank goodness for no Brexit - we were running out of global equity bull market catalysts!" Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning.

 

European equity markets surged on the news that Brexit polling showed a "resurgence" of the "Remain" camp. Here's the latest from MarketWatch:

 

"An opinion poll by Survation for newspaper the Mail on Sunday showed 45% in favor of remaining and 42% in favor of leaving. That telephone poll was conducted Friday and Saturday, after the killing of British politician Jo Cox. It shows a swing back to “remain,” as a previous survey conducted on Thursday by Survation had put Brexit in the lead by 3 points."

 

A Closer Look At Brexit, European Equities, & Pound Vs. USD - european equities 6 20 16

 

But take a look at the latest aggregate polling below, which shows "stay or leave" odds at essentially a coin toss (with 11% of the electorate undecided heading into Thursday's vote):

 

A Closer Look At Brexit, European Equities, & Pound Vs. USD - polling brexit

 

Here's additional Brexit analysis from McCullough:

 

"FTSE: +2.6% (DAX +3.3%) in a straight line to 6172 with intermediate-term TREND line up at 6335; anything that isn’t closed in Global Equity markets doing the same so they better not Brexit!"

 

 

"Big pop for Pound vs. USD of +1.8% taking it right back to where it’s been twice now (1.46-1.47) in both April and May; can it hold? Sure. Can it do this every day? Doubt it. Everything reflation should love it today regardless (Dollar Down)"

 

 

Finally, take a look at today's Chart of the Day, which shows the Pound/U.S. Dollar fluctuations tightly tracking Brexit "Remain" odds.

 

A Closer Look At Brexit, European Equities, & Pound Vs. USD - 06.20.16 Chart

 

More to come.


Thank goodness for no Brexit!

Client Talking Points

Pound

Big pop for Pound vs. USD of +1.8% taking it right back to where it’s been twice now (1.46-1.47) in both April and May; can it hold? Sure. Can it do this every day? Doubt it. Everything reflation should love it today regardless (Dollar Down).

FTSE

+2.6% (DAX +3.3%) in a straight line to 6172 with intermediate-term TREND line up at 6335; anything that isn’t closed in Global Equity markets doing the same so they better not Brexit!

UST 10YR

UST 10yr Yield +5bps to 1.66% on the potential of no-Brexit news or were bond yields oversold on #GrowthSlowing realities in US employment data. Shouldn’t take macro markets long to differentiate between the two once we get through today; 10yr Gilt +6bps to 1.21% vs. Spanish 10yr down -8bps to 1.43%.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/19/16 66% 2% 0% 8% 20% 4%
6/20/16 64% 4% 0% 10% 18% 4%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/19/16 66% 6% 0% 24% 61% 12%
6/20/16 64% 12% 0% 30% 55% 12%
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

Capital Brief: Donald Under Duress? ... & #Rubio Reconsiders app.hedgeye.com/insights/51791… via @HedgeyePotomac #Trump pic.twitter.com/ZDOwrgzjz1

@Hedgeye

QUOTE OF THE DAY

“Never tell your problems to anyone…20% don’t care and the other 80% are glad you have them.”

 -Lou Holtz

STAT OF THE DAY

Lebron James scored 27 points in last nights Game 7 win.


CHART OF THE DAY: The Volatile Brexit Crapshoot

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.

 

"... So if they the British don’t exit… and:

 

  1. The British Pound ramps right back to where it’s been multiple times this year ($1.46-1.47)
  2. The FTSE rips right back to intermediate-term @Hedgeye TREND resistance of 6335
  3. All equity markets worldwide go straight up …

 

What could possibly go wrong?

 

Nothing, obviously. Until the causal factor (worldwide cyclical and secular #GrowthSlowing) on why most things political that are American, Chinese, European, Japanese, etc. aren’t dying starts to get reported again, that is…"

 

CHART OF THE DAY: The Volatile Brexit Crapshoot - 06.20.16 Chart


A New Exit!

“I don’t believe in dying. It’s been done. I’m working on a new exit. Besides, I can’t die now – I’m booked.”

-George Burns

 

The late George Burns was a beauty. So is this global stock market. Of all the 1-12 month old narratives on why it can’t die now, “no Brexit” has to be the best one I’ve heard so far. Especially for super short-term investors, it’s the most irrefutable!

 

A New Exit! - Brexit cartoon 06.16.2016

 

Back to the Global Macro Grind

 

So if they the British don’t exit… and:

 

  1. The British Pound ramps right back to where it’s been multiple times this year ($1.46-1.47)
  2. The FTSE rips right back to intermediate-term @Hedgeye TREND resistance of 6335
  3. All equity markets worldwide go straight up …

 

What could possibly go wrong?

 

Nothing, obviously. Until the causal factor (worldwide cyclical and secular #GrowthSlowing) on why most things political that are American, Chinese, European, Japanese, etc. aren’t dying starts to get reported again, that is…

 

Before we get all emotional this morning and chase another chart to lower-highs on green, let’s take a step back and review where Global Equity markets are vs. June 20th (today) of 2015:

 

  1. SP500 = down -1.4%
  2. Dow = down -1.5%
  3. Nasdaq = down -5.2%
  4. Russell 2000 = down -9.7%
  5. Financials (XLF) = down -9.7%
  6. Utilities = UP +17.5%
  7. MSCI REIT = UP +9.9%
  8. US Equity Volatility (VIX) = UP +33.9%
  9. EuroStoxx600 = down -15.1%
  10. China (Shanghai Comp) = down -41.9%
  11. Hang Seng = down -24.6%
  12. Nikkei = down -22.8%
  13. MSCI World = down -7.2%
  14. MSCI EM = down -16.8%
  15. MSCI LATAM = down -17.0%

 

Don’t worry. I’m not just cherry picking the year-over-year return today. I can do this, every day, for the next month and the year-over-year return in most things US Equities will actually get worse.

 

What’s been getting better and better for the last year has been the relative and absolute return of being long assets that do well when real economic growth is slowing.

 

This is why longer-term bonds (and stocks that look like bonds) have been crushing it:

 

  1. US 10yr Yield = down 71 basis points year-over-year
  2. German 10yr Yield = down 79 basis points year-over-year
  3. Italian 10yr Yield = down 80 basis points year-over-year
  4. China 10yr Yield = down 70 basis points year-over-year
  5. South Korean 10yr Yield = down 96 basis points year-over-year
  6. Indonesian 10yr Yield = down 97 basis points year-over-year
  7. Japanese 10yr Yield = down 63 basis points year-over-year

 

Will a “no-Brexit” change this very obvious intermediate-term TREND? On its own, no. Time will.

 

Because it doesn’t line up with their own investment mandates (i.e. always be long so timing can’t really ever matter), this is what most equity bench-marking Portfolio Managers have had wrong for the last year – timing the economic cycle.

 

Time can’t die now. Barring any miracle that most of the central planning that’s been attempted can stop #TheCycle from doing what it always does when it laps the peaks of the economic, profit, and credit cycles… the cycle will continue to slow.

 

As the latest of #LateCycle components of a cycle slow (employment growth, consumer credit, advertising/marketing, business travel, etc.), we’ll get better and better entry points in certain equity sector styles.

 

Our long-cycle call for #GrowthSlowing probably won’t die this morning either. “No Brexit” or not, it’s booked until at least Q3/Q4 when macro markets have fully priced it in.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.54-1.72%

SPX 2055-2095

NASDAQ 4

DAX 90

VIX 16.08-23.33
USD 93.18-95.25
EUR/USD 1.11-1.14

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

A New Exit! - 06.20.16 Chart


The Macro Show with Jonathan Casteleyn Replay | June 20, 20160

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.


Dan Christman - The Modi 'Strategic Moment' - Are We There Yet?

 

While the nation continues to mourn the horrific tragedy in Orlando, it's important at the same time to reflect on the critical, even emotional visit by Indian Prime Minister Modi to Washington, DC last week. It was an important visit, on many levels - commercial as well as strategic.

  • Business groups like the U.S. Chamber of Commerce, in advance of the visit, laid out the business challenges and "hopes unfulfilled" with the Modi government. Despite a promising beginning to the Modi tenure as PM two years ago, with frequent statements by the Prime Minister about India being "open for business," long-standing impediments remain. In a letter to the president and Congressional leaders, these business groups stated, "Thus far, the new Indian government has produced troubling policies of its own," with "backsliding" in key areas.
  • Nevertheless, in the euphoria of the visit, substantive business announcements were made: Toshiba's Westinghouse unit has preliminarily secured a contract, to be finalized next year, to produce six nuclear power reactors in India, the first such "win" by a U.S. subsidiary since the breakthrough U.S.-India civil nuclear agreement nearly eight years ago; and to highlight their joint commitment to clean energy, the two leaders advanced a solar initiative that can marshal financing to help India "Green its Grid."

But one area not covered in the business coalition letter was military cooperation. And here, the "Modi Moment" has yet to produce a hoped-for strategic advance. U.S.-India defense cooperation (or lack of it) has been symbolized by the oft-stymied "Logistics Supply Agreement (LSA)." This potential deal was pushed strongly by U.S. Defense Secretary Ash Carter during his visit to India in April. The U.S. has been pressing India for over 10 years to consummate an LSA, and Carter and his Indian counterpart announced in April an "agreement in principle to conclude (the agreement) in the coming months." However, the deal remained unfulfilled prior to the prime minister's visit; and it was not inked during the Modi-Obama summit.

  • To be clear, an LSA even when concluded, would not be a major breakthrough in U.S.-India strategic relations. It is not a "basing agreement," for example; it would just give the U.S. Navy and other branches of our military occasional access to Indian basing support – refueling, spare parts, etc.
  • But even this minor deal has raised political objections in India; those blocking the arrangement cite India's tradition of "non-alignment" and a contemporary worry about being drawn into U.S. strategic quarrels with China.

The LSA (and some other minor but stymied defense deals on mapping and communication) are a metaphor for the complicated and evolving US-India geo-political relationship. In one of the few areas of U.S. foreign policy consistency that spans three administrations (Clinton, Bush43 and Obama), the White House has tried to draw the two countries closer together in a strategic relationship between the world's two largest democracies.

  • But, as reflected in the LSA stand-off, it has always posed problems in New Delhi. (I was reminded of this complication 10 years ago by an Indian Air Force Vice Chief of Staff when I was pushing the sale of U.S. combat aircraft; he curtly opined then that the "U.S. is not a reliable supplier!") 

Henry Kissinger summarized the big picture well. In talking about Bush43's efforts to effect U.S.-India "strategic coordination," Kissinger cautioned that "India's tradition of nonalignment (stands) in the way of a global arrangement."

 

So, while Modi's visit held hope for advances in key business areas, the business community was right in telling the president and Congress, "Hope is not a method." It still isn’t; much more needs to be done to open Indian markets, despite the welcomed breakthroughs last week in clean energy -- nuclear power in particular.

  • That same advice holds for security cooperation. For sure, India has eagerly accepted the transfer of U.S. technology, is enthused about co-development, participates more frequently with the U.S. in training exercises; and if an LSA is finally inked in the coming weeks -- and it is expected to be --  it will be yet another step in a slowly evolving strategic relationship. But despite the advances in our bilateral military ties since the late 90’s, New Delhi will continue to say, "No thanks" to a genuine strategic realignment with Washington.

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%
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