“I leave before being left. I decide.”
-Brigitte Bardot
That’s one of the opening quotes to one of the best professional sports books ever written. It, of course, was a book about hockey – The Game, by one of the greatest goaltenders of all-time, Ken Dryden.
Dryden’s masterfully narrated memoir chronicles his final season with the Montreal Canadians. He played in the NHL from 1 (sitting out one year) and won an incredible 6 Stanley Cups with the last one being in 1979. He left on top. He left on his own terms.
With the US stock market (SP500) registering yet another all-time closing high on Friday, “the top” that so many have been trying to call for the last year is evidently not yet in. When will it be over? Since “valuation” isn’t a catalyst, Mr. Market will decide.
Back to the Global Macro Grind…
Welcome to what we call Macro Monday! For those of you who are new to the global macro game of risk management, Mondays are the days where we have the opportunity to contextualize weekly macro moves within intermediate-term TRENDs @Hedgeye.
In terms of what I’m paying closest attention to, here’s what happened in FX last week:
- US Dollar Index up +1.1% last week and is +2.8% in the last 3 months = neutral TREND @Hedgeye
- EUR/USD was down -1.0% last week and is -2.3% in the last 3 months = neutral TREND @Hedgeye
- Yen (vs. USD) was down -1.1% last week and is -5.0% in the last 3 months = bearish TREND @Hedgeye
- Pound (vs. USD) was down -0.6% last week and is +1.4% in the last 3 months = bullish TREND @Hedgeye
- Canadian Dollar (vs. USD) was down -1.3% last week and is -5.4% in the last 3 months = bearish TREND @Hedgeye
- Aussie Dollar (vs. USD) was down -1.4% last week and is -6.8% in the last 3 months = bearish TREND @Hedgeye
Since European Stocks love it when the Euro goes down, they finally had a bounce of consequence last week:
- EuroStoxx600 was +1.4% to +7.7% YTD = neutral TREND @Hedgeye
- German DAX was +2.3% to +14.6% YTD = bullish TREND @Hedgeye
- Spanish IBEX was +2.3% to +10.4% YTD = bearish TREND @Hedgeye
While European Equity returns are both lower on an absolute and relative basis to the SP500 and Nasdaq in 2017, they’re much more sensitive to the direction of the European currency than US stocks are to the US Dollar.
European Bond Yields have diverged from US Treasury Yields in the last 3-6 months too. With European 10yr Yields down pretty much across the board again last week, here’s what US Treasury Yields did ahead of this week’s Fed rate hike:
A) UST 2yr Yield was +2 basis points last week to 1.79% = bullish TREND (bearish for the bonds) @Hedgeye
B) UST 10yr Yield was +1 basis point last week to +2.38% = bullish TREND @Hedgeye
While the US and European currencies have been range bound as of late, I continue to think that this divergence between long-term US and European Yields is a leading indicator for slower-for-longer Southern European growth and inflation in 1H of 2018.
Another thing Mr. Market is trying to decide on with respect to 1H 2018 is where the USA “Reflation Trade” goes from here. Might this past week be the beginning of the end on what’s been a great 3-month run for reflation oriented returns?
- Commodities (CRB Index) were down -3.0% last week moving back to NEUTRAL TREND @Hedgeye (from bullish)
- Oil (WTI) was down -1.7% last week but remains bullish TREND @Hedgeye
- Natural Gas got smoked for a -9.4% loss last week and is back to bearish TREND @Hedgeye
- Copper dropped -3.7% last week reversing from bullish to bearish TREND @Hedgeye
- Corn deflated another -1.7% last week and remains bearish TREND @Hedgeye
- Coffee deflated another -5.4% last week and remains bearish TREND @Hedgeye
- Cocoa deflated another -7.5% last week and is back to bearish TREND @Hedgeye
Deflated? Yep. That’s a very bad word for both the Fed and ECB (the BOJ is used to it) and that’s typically the word associated with last price that gets central market planners to go dovish.
So will this week’s rate hike by the US Federal Reserve be a “sell on the news” event? That’s what I’ll be doing, especially after 3 month moves like these:
A) Financials (XLF) up another +1.6% last week and +16.2% in the last 3 months
B) REITS (MSCI Index) down another -0.7% last week and down -1.1% in the last 3 months
C) Gold down another -2.6% last week and down -7.9% in the last 3 months
Put simply, as reflation ramped from bearish to bullish in SEP-NOV, shorter-term US rates (UST 2yr Yield) ripped… the Fed went hawkish on a DEC hike… and the aforementioned rate-sensitive asset allocations and sub-sector exposures reacted in kind.
Since Reflation’s Rollover (in real-time market prices) just started here in DEC, yesterday’s news is going to be what’s reported in the USA this week in both the US PPI (producer prices) and CPI (consumer prices) reports. Both are NOV numbers.
As has so many times been the case, “inflationary pressures” leave before being left… and Mr. Market will decide when the deflation risk is back “on” in your portfolios.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.32-2.42% (bullish)
SPX 2 (bullish)
NASDAQ 6 (bullish)
DAX 120 (bullish)
VIX 9.13-10.81 (bearish)
USD 92.70-94.15 (neutral)
EUR/USD 1.17-1.19 (neutral)
YEN 111.17-113.68 (bearish)
GBP/USD 1.33-1.35 (bullish)
Oil (WTI) 56.00-58.96 (bullish)
Nat Gas 2.69-2.99 (bearish)
Gold 1 (bearish)
Copper 2.90-3.06 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
