“The richest gift bestowed on the Chinese people by the heavens.”
That’s what the General in the People’s Liberation Army once called Central Asia. “For China, Central Asia offers an abundance of natural resources. Kazakhstan has large reserves of oil and uranium, Turkmenistan supplies nearly half of China’s imported gas…
But… “Central Asia only accounts for around 1% of Chinese trade…” (China’s Asian Dream, pg 73)
Oh damn the details on the 1%... or any details on what this alleged China “trade deal” is going to entail. You just have to “buy stocks” (instead of Treasuries and Gold on the dip) after this centrally planned bounce from the heavens, eh?
Back to the Global Macro Grind…
It’s Macro Tuesday @Hedgeye! Welcome back and thanks for joining us on our measuring and mapping expedition of Global Macro data and market signals. It’s been a rough start to the year but it certainly beats being a qualitative Macro Tourist, over time.
Reviewing where macro markets moved that last week, let’s start with the Global Currency market:
- US Dollar Index was +0.7% last week to +0.2% YTD and remains Bullish @Hedgeye TREND
- EUR/USD was down -0.8% last week to -0.9% YTD and remains Bearish @Hedgeye TREND
- Yen corrected -1.1% vs. USD last week to -0.1% YTD and remains Bullish @Hedgeye TREND
- Pound was +0.2% vs. USD last week to +0.9% YTD and remains Bearish @Hedgeye TREND
- Argentine Peso was -1.2% vs. USD last week (down -49.8% in the last year) and remains Bearish @Hedgeye TREND
So I was a buyer of Yen on weakness and I’m staying with the Euro on the short side vs. USD as the European economy is slowing more than USA’s is. When the Global Economy is in Quad 4, you buy Dollars (not Argentine Pesos) anyway.
As the US economy moves from Quad 4 to Quad 3 in the coming quarters, I expect the topping process of relative USD strength to take hold. The market agrees with both that and the Fed going dovish. It doesn’t think that the ECB is Dovish Enough, yet.
Despite the big bounce from the heavens in High Beta US Equity Exposure (not something we’ve been long, since September of 2018), the correction in the things we like on the long side was relatively benign last week:
- 2yr US Treasury Yield was up +7 basis points to 2.61% last week but remains Bearish TREND @Hedgeye
- 10yr US Treasury Yield was up +9 basis points to 2.79% last week but remains Bearish TREND @Hedgeye
- Gold corrected -0.7% last week to -0.1% YTD and remains Bullish TREND @Hedgeye
What’s Bearish TREND for both Treasury Yields and Real Interest Rates is Bullish TREND for both Treasuries (across the curve) and Gold. We were shorting both on bounces at this time last year. That’s when US growth and inflation were #accelerating.
Back to the bounce in HIGH BETA as a Factor Exposure:
A) HIGH BETA stocks led last week’s bounce at +4.2% on the week to +13% YTD
B) LOW BETA stocks lagged, big time, last week at +0.9% on the week to +3.7% YTD
*mean performance of Top Quartile vs. Bottom Quartile, SP500 companies
This HIGH BETA move was perpetuated by:
A) Oil bouncing another +4.1% last week to +18.3% YTD (still Bearish @Hedgeye TREND)
B) Energy Stocks (XLE) up another +3.0% last week to +11.3% (still Bearish @Hedge TREND)
C) High Yield OAS (spread) down another -12 basis points last week to 4.32%
So now what? Are the Chinese going to centrally plan away The Global Economic Cycle? Are they going to make our Wall Street low of +1.80% headline US GDP (due out on JAN 30th) go away and stop #PeakCycle US Earnings from slowing in the coming quarters?
I’m obviously not positioned for that or wouldn’t have gotten squeezed again last week. I’m positioned for economic gravity trumping (pun intended) this bounce from the heavens at a time when The Machine and implied volatility are not prepared for it.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.62-2.79% (bearish)
UST 2yr Yield 2.45-2.62% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Shanghai Comp 2 (bearish)
VIX 17.07-25.57 (bullish)
USD 94.70-96.30 (bullish)
EUR/USD 1.12-1.15 (bearish)
USD/YEN 107.65-110.12 (bearish)
GBP/USD 1.26-1.30 (bearish)
Oil (WTI) 47.63-54.30 (bearish)
Gold 1 (bullish)
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer