Long USA, Short EM #Reiterated

“There were no fewer than 123 debasements in France alone between 1285 and 1490.”
-Felix Martin 

In debasement terms, the 21^st century is going toe-to-toe with any other century post the 13^th. That’s mainly because central bankers were put on this earth to save us from both economic gravity and things like cycles, eh? 

Eh now, easy on the eh’s this morning. This is no place for political commentary on my homeland. As you know, trending macro market moves aren’t moving on Trump vs. Trudeau. They continue to move on the rates of change in growth and inflation. 

As real growth continues to slow in China, Europe, and Emerging Markets, what do you think central market planners there are going to do? As they debase and devalue, the US Dollar goes up, eh. 

Back to the Global Macro Grind… 

Welcome to the 2^nd Macro Monday of the summer of 2018. This is where we make macro great again, measuring and mapping last week’s macro market moves within the context of intermediate-term @Hedgeye TRENDs. 

Since last week was the only real correction week for the US Dollar in the last 8 weeks, let’s start with the weekly FX moves: 

1. US Dollar Index was -0.7% on the week to +1.5% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD was +0.9% on the bounce week to -2.0% YTD and remains Bearish TREND @Hedgeye
3. GBP/USD was +0.4% on the bounce week to -0.8% YTD and remains Bearish TREND @Hedgeye
4. Yen (vs. USD) was flat on the week at +2.9% YTD and is a Neutral TREND @Hedgeye
5. Brazilian Real bounced +1.5% last week to -10.7% YTD and remains Bearish TREND @Hedgeye
6. Mexican Peso fell another -1.7% last week to -3.0% YTD and remains Bearish TREND @Hedgeye 

And, if you care on my homeland’s currency, the Canadian Dollar was up +0.2% last week to -2.8% YTD and it too remains a Bearish TREND @Hedgeye (as most currencies in countries with slowing economies currently do). 

Last week’s Global Equity market moves continued to sing the same song of #GlobalDivergences: 

1. SP500 was up +1.6% last week to +3.9% YTD and remains Bullish TREND @Hedgeye
2. NASDAQ was up another +1.2% last week to +10.8% YTD and remains Bullish TREND @Hedgeye
3. Russell 2000 was up another +1.5% last week to +8.9% YTD and remains Bullish TREND @Hedgeye
4. EuroStoxx600 was down another -0.5% last week to -1.0% YTD and remains Bearish TREND @Hedgeye
5. Italian Stocks got tagged for a -3.4% loss last week to -2.3% YTD and remain Bearish TREND @Hedgeye
6. Swiss Stocks dropped another -1.2% last week to -9.3% YTD and remain Bearish TREND @Hedgeye
7. Emerging Markets (MSCI Index) bounced +0.5% last week to -2.0% YTD but remain Bearish TREND @Hedgeye
8. EM LATAM fell hard (relative + absolute) -3.7% last week to -12.6% YTD and remains Bearish TREND @Hedgeye
9. Brazilian Stocks got crushed for a -5.6% loss last week to -4.5% YTD and remain Bearish TREND @Hedgeye
10. Turkish Stocks continued to crash losing another -3.3% last week to -16.9% YTD and remain Bearish TREND @Hedgeye 

Our Macro Research Desk has been fielding plenty of calls on Brazil in particular as of late. The answer on “what’s going on in Brazil” is as simple as simplifying the complex @Hedgeye gets: Brazil is in Quad3. 

For cyclically oriented equities and speculative credit, Quad3 is not good. Stagflation is especially not good when a country is coming from Quad1 and/or Quad2 (Brazil was there for almost 2 years). This is commonly called a cycle. 

We got a lot of pushback on this #UnderweightEM call when we started making it in January. One prospective client in LA didn’t like our view at all (he was long lots of Brazil). 

He kept asking “but how do you know the data is going to slow”, so I kept asking him how he knew it wasn’t? Our #process, of course, refreshes the answer on whether GROWTH and/or INFLATION is accelerating or slowing every day. 

That’s why last week’s move in Brazil should have surprised no one who is dispassionately data dependent. The real #GrowthSlowing data in Brazil and Mexico in particular has been readily apparent for months now. 

Back to a Quad2 country (USA) that had another great week on both a relative and an absolute basis, the Sector Style callout at the US Equity level was stark: 

1. US Consumer Discretionary (XLY) was up another +3.2% to +11.4% YTD and remains Bullish TREND @Hedgeye
2. US Utilities (XLU) were down another -3.0% to -7.6% YTD and remain Bearish TREND @Hedgeye 

This is why Consumer Discretionary (XLY) and Utilities (XLU) have remained in our Top and Bottom 3 Sector picks since the US economy started pounding out Quad2 data (when both GROWTH and INFLATION are #accelerating). It’s all process. 

At the FACTOR exposure level, these relative (vs. Global Equities) and absolute gains for US growth and inflation #accelerating exposures have given birth to a big breakout in things like: 

1. SMALL CAP which was +2.3% last week and +3.5% in the last month alone (vs. Turkey’s stock market -7.8%!)
2. HIGH SHORT INTEREST was +2.3% last week and +3.9% in the last month (vs. Italy’s stock market -10.1%)

*mean performance of Top Quartile vs. Bottom Quartile, SP500 companies 

Like inflation and earnings #accelerating, I realize these are all late-cycle realities and what we like is getting long in the tooth… 

That said, the slow-down in both EM and Europe is still in the early innings and I have no need to explain why I’d be long them. The rate of change data simply doesn’t support being long those exposures. 

UST 10yr Yield 2.77-3.03% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
VIX 11.08-17.05 (bearish)
USD 93.06--94.75 (bullish)
EUR/USD 1.15-1.18 (bearish)
YEN 108.40-110.52 (bearish)
GBP/USD 1.32-1.35 (bearish)
Oil (WTI) 63.98-70.16 (bullish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer