“He soon felt that the fulfillment of his desires gave him only one grain of the mountain of happiness he had expected. This fulfillment showed him the eternal error men make in imagining that their happiness depends on the realization of their desires.” -Leo Tolstoy
The most noteworthy event on the political ledger of the geopolitical calendar this week is the summit between Trump and Putin in Finland. Much of the main stream media has already written off the summit as an “eternal error” of President’s Trump’s foreign policy “desires.” Based at least on these news reports, we can safely assume that expectations around this summit are low.
As a case in point, here's the above the fold headline on the New York Times today:
“Just by Meeting with Trump, Putin Comes Out Ahead”
Clearly, we can just end the summit before it begins and chalk one up for Vlad. Conversely, if we believe the bad news is baked in, perhaps there’s potential for positive news in a few areas.
- General relations – With the accusations facing the Russians of tampering in the recent U.S. Presidential election, even a marginal shift in tone between the two countries would be positive;
- Oil prices – We saw indications of this late last week, but a willingness by the Russians to flex their oil production “muscle” would be negative for the price of oil and positive for U.S. (and global) consumers; and
- Foreign policy – Clearly, expectations for resolution on any major foreign policy issues are somewhat limited, and rightfully so, but any positive movement on the Ukraine, Syria, etc. would be meaningful.
If there is one trend in geopolitical headlines this year for stock market operators, it’s that you should buy or, as the case may be, sell the news. One needs to look no further than the fact that the SP500 has gone up every day but one since China and the U.S. imposed tariffs on each other.
Back to the Global Macro Grind...
Speaking of oil . . .
WTI is down another -1.8% this morning and Brent (September) is down -1.7% to $74.04. For WTI, this is a decline of more than 5% in just over a week. Whether it be the Russians talking about increasing production, the U.S. whispering about releasing emergency reserves, or Saudi Arabia offering additional cargoes for Asian customers, it seems the reality is sinking in that the world is not short on oil. Note: despite the recent decline WTI is still in Bullish Trend in our Hedgeye Risk Ranges.
The sequential decline in the oil price is a continued tailwind for our view that inflation may be peaking domestically in the July-ish time frame. In the Chart of the Day below, we highlight our current view of the trajectory of inflation, which we see peaking then rolling into the end of the year. #Quad4 anyone?
Switching gears for a second from the West, my colleague Darius Dale sent a quick update on his views on China late Friday, which is worth revisiting. According to Darius:
“China Still Slowing: Just in time for what we’ve previously highlighted as policy “tinkering” to show up in the credit growth data, Global #Divergences takes a bite out of Chinese Exports (-90bps to 11.3% YoY in JUN). Specifically, both M0 and M1 growth accelerated modestly to 3.9% YoY and 6.6% YoY, respectively, while M2 growth decelerated -30bps to 8.0% YoY in the same month. While these numbers don’t necessarily warrant reading into, the sharp deceleration in Import growth (-1190bps to 14.1% YoY) is confirming of our view that the massive spike in Chinese demand associated with the “Shanghai Accord” created an “uncompable” comp for the global industrial cycle it effectively rescued. We reiterate our #ChinaSlowing theme ahead of the sharp acceleration in base effects for #OldChina in the 4Q18-1Q19E timeframe.”
This view was validated with China printing a +6.7% GDP number late last night, which, while in line with consensus, was a sequential decrease from last quarter.
Rising personal and corporate debt, accelerating money supply, tough comps and slowing growth are all percolating to create a dangerous mixture economically in China and underscore our view that Chinese is growth is slowing and likely to continue to slow. Meanwhile, Chinese steel output hit a daily production high of 2.67mm tons in June . . . #Glut.
Domestically, the economic data out this morning can largely be characterized as a punt. July U.S. Empire Manufacturing came in at +22.6 versus consensus at 20.0. Meanwhile, June Retail sales were basically in line at +0.5% and +0.4% (ex-autos). On the positive side of the ledge, May Retail sales were revised higher to +1.3% from the original print of +0.8%. So, the U.S. consumer keeps on consuming . . . at least for now.
The caveat of course is that June did slow from May, despite meeting consensus, and a key driver of May’s upwardly revised retail sales number was the, for lack of a better word, explosion in consumer credit. As you recall, the increase in credit from April to May was $14BN, which crushed expectations.
And as Ralph Waldo Emerson famously wrote:
“A man in debt is so far a slave.”
Indeed.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.80-2.90% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Energy (XLE) 74.30-77.54 (bullish)
REITS (VNQ) 80.41-83.46 (bullish)
Industrials (XLI) 70.99-74.44 (bearish)
Nikkei 218 (neutral)
DAX 120 (bearish)
VIX 11.05-17.50 (bearish)
USD 93.45-95.25 (bullish)
Oil (WTI) 69.50-75.90 (bullish)
Nat Gas 2.74-2.95 (bullish)
Gold 1 (bearish)
Copper 2.70-2.95 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
