Predicting More Risk

“During many ages, the prediction, as it is usual, contributed to its own accomplishment.”
-Edward Gibbon 

That’s the thing about market risks. At first they happen slowly, then they happen all at once. Last week we saw a broadening of Global Quad 4 risks across currencies, commodities, equities, etc.

Not to go dark on you this morning (because plenty of these risks are signaling immediate-term #oversold within Bearish @Hedgeye TRENDs), but the aforementioned quote comes from Gibbon’s The History of The Decline and Fall of the Roman Empire. 

As Richard Bookstaber goes on to write in The End of Theory: “Individuals’ beliefs lead to their actions, and those actions can in turn lead the beliefs to be confirmed” (pg 58). Believe Mr. Market when he signals Quad 3 and 4. That’s when real growth is slowing. 

Back to the Global Macro Grind…

Welcome to Macro Monday! For those of you who are new to our research and risk management #process, on the 1^st day of the week we contextualize last week’s macro market moves within intermediate-term @Hedgeye TRENDs. 

Let’s start with #StrongDollar and the ongoing 2018 currency crash: 

1. US Dollar Index was up another +0.25% last week to +3.5% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD was down another -0.4% last week to -3.8% YTD and remains Bearish TREND @Hedgeye
3. British Pound was down another -0.3% vs. USD last week to -4.4% YTD and remains Bearish TREND @Hedgeye
4. Canadian Dollar was down another -0.9% vs. USD last week to -4.5% YTD and remains Bearish TREND @Hedgeye
5. Russian Ruble was down another -3.7% vs. USD last week to -17.6% YTD and remains Bearish TREND @Hedgeye
6. Indian Rupee was down another -1.8% vs. USD last week to -11.5% YTD and remains Bearish TREND @Hedgeye
7. Chilean Peso was down another -1.6% vs. USD last week to -10.9% YTD and remains Bearish TREND @Hedgeye
8. South African Rand was down another -3.6% vs. USD last week to -18.5% YTD and remains Bearish TREND @Hedgeye 

No, Trump did not start a thumb war with Chile or South Africa. Our prediction that South Africa’s economy would be in Quad 4 by Q4 of 2018 caused its own currency crash. 

US Equities finally sold off from all-time highs last week, but the Pain Trade globally was much more pronounced: 

1. USA’s SP500 corrected -1.0% last week to +7.4% YTD and remains Bullish TREND @Hedgeye
2. Emerging Markets (MSCI) deflated another -3.1% last week to -11.7% YTD and remain Bearish TREND @Hedgeye
3. Germany’s DAX dropped another -3.3% last week to -7.4% YTD and remains Bearish TREND @Hedgeye
4. Spain’s IBEX fell another -2.4% last week to -8.7% YTD and remains Bearish TREND @Hedgeye
5. Russia’s RTSI got tagged for a -3.8% loss last week to -9.0% YTD and remains Bearish TREND @Hedgeye
6. Greek Stocks got hammered for a -5.7% loss last week to -14.3% YTD and remain Bearish TREND @Hedgeye 

As you know, some European stock markets like Spain’s IBEX have been making lower-highs from their respective 2017 cycle-highs for well over a year now. So most of that “risk” isn’t new to anyone keeping score. 

US interest rate risk isn’t new either. The last of the classic late-cycle “inflation” readings (wages) got US Treasury Yields to pop to lower-highs on Friday too: 

1. UST 2yr Yield was +8 basis points on the week to 2.70% and remains Bullish TREND @Hedgeye
2. UST 10yr Yield was +8 basis points on the week to 2.94% and is barely back to Neutral TREND @Hedgeye 

But that consensus “hawkishness” is very much in line with consensus macro positioning. Looking at last week’s CFTC non-commercial futures and options positioning, here are the net SHORT positions in US Treasuries across the curve: 

1. UST 2yr net SHORT position got more bearish at -158,001 net short contracts last week
2. UST 5yr net SHORT position got more bearish at -864,516 net short contracts last week
3. UST 10yr net SHORT position got more bearish at -656,136 net short contracts last week 

And that doesn’t surprise us as protecting against a late-cycle “breakout in interest rates”, is really the last of the big 3 consensus positions we think will eventually come unglued by the end of 2018: 

1. A “Globally Synchronized Recovery”
2. A “weak Trump Deficit Dollar” and “strong Emerging Markets and Commodities”
3. “Rising interest rates” to 3.5% then 4% on the US 10yr Yield 

Despite rates popping on Friday, Bond Proxies (Utes and Staples) were the best place to be in the US Equity market last week: 

1. Utilities (XLU) were +1.2% on the week to +2.7% YTD and remain Bullish TREND @Hedgeye
2. Energy (XLE) was down another -2.2% on the week to +0.7% YTD and is now Bearish TREND @Hedgeye
3. Tech (XLK) corrected -2.7% on the week to +15.1% YTD and remains Bullish TREND @Hedgeye 

Ex-Oil, Commodity #Deflation continued to manifest as well: 

1. Copper’s crash continued down another -1.8% last week to -21.7% YTD and remains Bearish TREND @Hedgeye
2. Aluminum was down another -3.5% last week to -11.3% YTD and remains Bearish TREND @Hedgeye
3. Lumber got crushed for a -7.1% loss last week to -3.9% YTD and remains Bearish TREND @Hedgeye 

Altogether that’s why I think long-term US yields have been making lower-highs since May. Mr. Market is stealth in pricing in big causal factors like #PeakCycle growth and inflation. So I’ll go ahead and predict more of what he’s already predicting. 

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

UST 10yr Yield 2.82-2.95% (bearish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 52.80-54.89 (bullish)
Shanghai Composite 2 (bearish)
DAX 116 (bearish)
VIX 11.43-15.41 (bullish)
USD 94.25-95.90 (bullish)
EUR/USD 1.15-1.17 (bearish)
YEN 110.39-111.89 (bearish)
GBP/USD 1.28-1.30 (bearish)
Oil (WTI) 67.09-70.70 (bullish)
Nat Gas 2.73-2.92 (bearish)
Copper 2.57-2.76 (bearish) 

Best of luck out there this week,

KM 

Keith R. McCullough
Chief Executive Officer