#EuropeSlowing, Reiterated

“Often the biggest changes in history are the achievements of thinly documented, informally organized groups of people.”
-Niall Ferguson 

Really, Niall? And here I thought that central bankers and technocrats in Europe were going to save us from ever having an economic cycle again. Ha!

Top of the risk management morning to all of you who have been seeing #GlobalDivergences develop for the past 5-6 months.

The aforementioned quote comes from Niall Ferguson’s most recent history book, The Square and the Tower, which focuses on contextualizing the history of political hierarchies vs. networked peoples. In terms of self-education, it’s a heavy but important read.

Back to the Global Macro Grind…

With US Earning Season #over, it’s time for investors to contextualize what’s been happening in the global economy for all of 2018 (i.e. not a “globally synchronized recovery”). This morning our 11 month old call on #EuropeSlowing will be a hot Macro Tourist destination.

When do secular (demographics, debts, deficits) and political issues really matter to macro markets? A: when cyclical growth is slowing. That’s not new this morning. Neither is the basic reality that market risks happen slowly sometimes, then all at once.

Since it’s Day 1 of the work week for US market participants, let’s not freak-out this morning. Instead, as Yale Lacrosse Coach Shay said yesterday (after winning Yale’s 1^st ever National Championship), “we just stay with the #process.”

This morning’s melt-down in the Euro was set up by our US Dollar Bottoming call at the beginning of April:

1. USD Dollar Index was up for the 5^th week in the last 6, closing up another +0.7% to +2.3% YTD = Bullish TREND @Hedgeye
2. Euro (vs. USD) was down another -1.0% last week to -2.9% YTD = Bearish TREND @Hedgeye
3. Pound (vs. USD) dropped another -1.2% last week to -1.5% YTD = Bearish TREND @Hedgeye
4. Canadian Dollar (vs. USD) fell another -0.7% last week to -3.1% YTD = Bearish TREND @Hedgeye
5. Turkish Lira (vs. USD) continued to #crash last week, down another -4.7% to -19.3% YTD = Bearish TREND @Hedgeye

But no worries on the Turkish, Argentine, or Indonesia currency crashes. No, no, no. Forget EM (Emerging Markets) #slowing this morning too. All tourist iPhone and Instagram cams have to be focused on European stocks and bond yields this morning!

Pre this morning’s -2.7% decline in the Italian stock market, here’s how European Equities traded last week:

1. ITALY – down -4.5% on the week after breaking @Hedgeye TREND support in the week prior
2. SPAIN – down -2.8% on the week after having been a Bearish @Hedgeye TREND for almost a year now
3. GREECE – down -2.5% on the week and now -12.5% in the last month, reiterating Bearish @Hedgeye TREND

Sovereign Bond Yields were setting up for this epic #GobalDivergence we are seeing this morning, partly on last week’s drop in Oil prices, but mostly based on “credit risk” mounting in the weakest European economies:

1. USA – last week’s abrupt -12 basis point drop in the UST 10yr Yield is seeing another -8bps come out to 2.85% this am
2. GERMANY – last week’s big reversal in yields sees Germany’s 10yr Bund Yield drop another -10bps this am to 0.24%
3. ITALY – last week’s epic ramp in bond yields sees Italy’s 10yr Yield ramp another +44bps this am to +3.10%

All the while, the anchor man of slower-global-growth-for-longer (the Swiss 10yr Yield) is back down to a NEGATIVE yield of -0.16%. So that should make everyone who is still leaning long Euros, EM, etc. feel totally safe on one asset allocation side of the boat.

I wouldn’t call last week’s -4.9% correction in Oil (WTI) a nothing event. That’s mainly because Mr. Market is telling me to pay attention to:

1. Oil (WTI) @Hedgeye TREND support = $66.02/barrel
2. UST 10yr Yield @Hedgeye TREND support = 2.85%

Those 2 factors in my macro model certainly correlate with one another. In the face of more US Wage #InflationAccelerating this week (US jobs report is on Friday), imagine if bond yields started to signal Quad 4 in the US alongside what they’re already signaling in Europe?

I can.

I can imagine anything Mr. Market wants me to as long as we continue to measure and map both local and global economies within our 4 Quadrant GIP modeling process. We already know the Global Economy is in a mix of Quad 3 and 4. Bond yields get body slammed in Quad 4.

So bring the media’s “experts” down from The Tower on what’s happening in Italy this morning. All the while, those of us in The Square will stay with the #process. We’ll stay humble and expect both the rate of change data and Mr. Market to show us the way.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now as follows:

UST 10yr Yield 2.85-3.14% (bullish)
SPX 2 (bearish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Energy (XLE) 73.28-79.35 (bullish)
REITS (RMZ) 1045-1099 (neutral)
Industrials (XLI) 73.81-76.60 (bearish)
DAX 126 (bearish)
VIX 12.11-15.92 (bullish)
USD 92.80-94.85 (bullish)
EUR/USD 1.14-1.18 (bearish)
YEN 108.52-111.05 (bearish)
GBP/USD 1.32-1.35 (bearish)
Oil (WTI) 66.02-73.09 (bullish)
Nat Gas 2.77-3.02 (bullish)
Corn 3.99-4.11 (bullish) 

Best of luck out there this week,
KM 

Keith R. McCullough
Chief Executive Officer