Rest of The World's Cyclical Risks

“I was born for a storm and a calm does not suit me.”
-Andrew Jackson 

I don’t love politicians, but I loved that quote. Hedgeye was born in an epic storm (2008). While we’ve capitalized on calm US equity and credit markets for the past few years, a general complacency about a “globally synchronized recovery” did not suit us in January. 

The aforementioned quote comes from John Meacham’s American Lion – Andrew Jackson in the White House. It too was published in 2008. It’s amazing how many lessons about secular risks remain from that time. When cycles slow, they become readily apparent. 

Should China’s stock market moving into crash mode (-20% since JAN) or an EM Asia market like the Philippines crashing (-23% since JAN) in kind surprise us given #ChinaSlowing? Nope. European equity markets breaking down alongside the Euro shouldn’t either. 

Back to the Global Macro Grind…

It’s Macro Monday @Hedgeye! For the benefit of our new subscribers this morning (thanks for joining us), our Monday morning notes focus on contextualizing last week’s moves in Global Macro through the lens of our intermediate-term @Hedgeye TREND duration. 

Let’s start with the currency market: 

1. Last week was a counter-TREND move in FX with the US Dollar Index correcting -0.3% to +2.6% YTD = Bullish TREND @Hedgeye
2. EUR/USD bounced +0.4% last week to $1.17 but remains Bearish TREND @Hedgeye
3. Argentina’s Peso (vs. USD) bounced +3.9% last week to -31.1% YTD and remains Bearish TREND @Hedgeye
4. Turkey’s Lira (vs. USD) bounced +1.0% last week to -18.8% YTD and remains Bearish TREND @Hedgeye
5. Brazil’s Real (vs. USD) did not bounce last week – it lost another -1.5% to -12.5% YTD and is still Bearish TREND @Hedgeye
6. Canada’s Dollar (vs. USD) didn’t bounce either – it was -0.4% last week to -5.2% YTD and is still Bearish TREND @Hedgeye 

Yeah, it’s really demoralizing when the Dollar has a slight correction week and your currency can’t even bounce. The Brazilian 10yr Yield continues to bounce higher this morning to 12.07%. That puts it +107 basis points higher in the last month alone. Brazil is in Quad 3. 

How about other 10yr sovereign yields? 

1. UST 10yr Yield was down another -3 basis points last week and down again this morning to 2.87%
2. Italy’s 10yr Yield was up +9 basis points last week and up another +11bps this morning to 2.79%
3. Indonesia’s 10yr Yield was up +25 basis points last week (leading gainers) to +7.54% 

Indonesia? Who cares about Indonesian rate cycle risk and Philippines equity market #crash risk? Everyone who does macro using the principles of fractals does. Measuring and mapping the risk of the global economic system doesn’t happen staring at the Dow, in points. 

That said, the Dow is one of the many factors that registers a daily return in our globally interconnected model. Here’s how it looked vs. the major US Equity markets last week: 

1. Dow Jones Industrial Index was down -2.0% on the week to -0.6% YTD = Bearish TREND @Hedgeye
2. SP500 was down -0.9% on the week to +3.0% YTD = Bullish TREND @Hedgeye
3. NASDAQ was down -0.7% on the week to +11.4% YTD = Bullish TREND @Hedgeye
4. Russell 2000 was +0.1% on the week to +9.8% YTD = Bullish TREND @Hedgeye 

That’s right Sesame Street fans, “one of these things is not like the others – one of these things just doesn’t belong… can you tell which thing is not like the others, by the time I finish my song?” 

A: The Dow, Bro 

Why? That’s mainly because of #GlobalDivergences (Q1 Macro Theme @Hedgeye reiterated in Q2 … and again in Q3 on our call that we will host this Thursday – ping if you’d like to join the call). 

The Russell is an almost pure play on the US domestic economy #accelerating in Q2 whereas the Dow has plenty of global cyclical baggage associated with China, Europe, and EM #slowing. 

How did the Global Equity Market look relative to the Russell and NASDAQ (which registered intra-week-all-time-highs) last week? 

1. Europe (EuroStoxx 600) dropped back into the red last week closing down -1.1% to -1.1% YTD = Bearish TREND @Hedgeye
2. Germany’s DAX led European losers falling -3.3% last week to -2.6% YTD = Bearish TREND @Hedgeye
3. Poland (EM Europe proxy) fell another -1.9% last week to -11.2% YTD = Bearish TREND @Hedgeye
4. Emerging Markets (MSCI Index) dropped another -3.0% last week to -6.8% YTD = Bearish TREND @Hedgeye
5. EM LATAM lost another -0.9% last week to -14.9% YTD = Bearish TREND @Hedgeye 

That’s right Colombia World Cup fans – I am picking on Poland this morning too! It’s actually not that hard to pick on Bearish @Hedgeye TRENDs when they… trend. 

That’s what Bullish TRENDs @Hedgeye do – they trend too! That’s why it’s so important to be diligently measuring and mapping the cycle to stay ahead of Phase Transitions (i.e. @Hedgeye TREND reversals). 

Most of what I’m recapping from last week is consistent with TRENDs we’ve been calling for the last 6 months. The new potential Phase Transition we’ve been calling out for the last 2-3 weeks is in US rates. 

“Have Rates Peaked?” will be reviewed in our Q3 Macro Themes Call on Thursday. No, it’s not 2008, but with Utilities (XLU) and REITS (MSCI) +2.4-2.5% last week vs. Industrials (XLI) down another -3.3% on the week… 

It’s hard to ignore the relative performance of being long US safety vs. the rest of the world’s cyclical (and secular) risks. 

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

UST 10yr Yield 2.85-2.98% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
REITS (VNQ) 78.40-80.99 (bullish)
Industrials (XLI) 71.51-74.45 (bearish)
DAX 124 (bearish)
VIX 11.30-14.98 (bearish)
USD 93.50-95.11 (bullish)
EUR/USD 1.14-1.17 (bearish)
Oil (WTI) 64.12-69.09 (bullish) 

Best of luck out there this week,

KM 

Keith R. McCullough
Chief Executive Officer