“He worked hard to develop a simple, compact style of speaking and writing.”
-Doris Kearns Goodwin 

In her latest American History book, Leadership In Turbulent Times, that’s how Kearns Goodwin explains how Abraham Lincoln “could be understood by all classes with short, clear sentences.” 

“When he was ignorant on any subject one friend recalled, no matter how simple it might make him appear he was always willing to acknowledge it.” (pg 11) 

Acknowledging that we don’t know what we don’t know about the future provides an ongoing opportunity to learn. With central banks (ECB joining the Fed and PBOC last week) leading equity markets higher in 2019, what could possibly go right (or wrong)? 

Central Banks Leading? - z central bank cartoon 02.17.2016

Back to the Global Macro Grind… 

Post President’s Day, we get our 1st Macro Tuesday of 2019! For those of you who are new to our independent research and risk management #process, on the 1st day of the week we review last week’s macro moves within the context of @Hedgeye TRENDs. 

As usual, let’s start with the Global Currency market: 

  1. US Dollar Index was up another +0.3% last week to +9.4% y/y and +0.8% YTD and remains Bullish TREND @Hedgeye
  2. Euro was down another -0.3% vs. USD last week to -1.5% YTD and remains Bearish TREND @Hedgeye
  3. Yen was down -0.6% vs. USD last week to -0.7% YTD and moved from Bullish to Bearish TREND @Hedgeye
  4. Pound was down -0.4% vs. USD last week to +1.1% YTD and is currently Bearish TREND @Hedgeye
  5. Argentine Peso was down another -1.9% vs. USD last week to -2.6% YTD and remains Bearish TREND @Hedgeye
  6. South African Rand was down -3.2% vs. USD last week to +2.0% YTD and remains Bearish TREND @Hedgeye 

With Italian Industrial Orders DOWN -5.3% year-over-year in DEC (reported this morning), even the ECB guys know that Italy is now in a recession. Look at these 2 comments from the ECB’s Benoit Coeure: 

A) FEB 8th - ECB's Coeure says not enough elements to conclude Eurozone facing lasting and serious slowdown -wires
B) FEB 15th - ECB’s Coeure says economic slowdown is stronger and broader than expected – wires

I couldn’t make that up if I tried. Then again, the ECB has tightened into EVERY European slow-down going back to 2008, so it’s only a matter of time before they “expect” what the data has already done. 

After being down in the week prior, European stocks loved the ECB’s Dovish pivot (the bears did not): 

  1. EuroStoxx600 bounced +3.0% last week to +9.3% YTD but remains Bearish TREND @Hedgeye
  2. Germany’s DAX bounced +3.6% last week to +7.0% YTD but remains Bearish TREND @Hedgeye
  3. Italy’s MIB Index bounced +4.5% last week to +10.3% YTD but remains Bearish TREND @Hedgeye 

There’s no follow through to the bounces within Bearish TRENDs this morning. But, after staying with the #process, and not chasing any European Equity bounce since going Bearish on Europe over 1-year ago, should I start chasing charts now?

That’s not what I do. What I would do, however, is stop shorting something like SPY if the VIX can hold (and stay) below 15. That’s a market signal that I’ve been paid to learn from. But can last week’s move hold? 

A) VIX dropped another -5% last week to -41% YTD and is currently Bearish @Hedgeye TREND (barely)
B) SP500 (SPY) closed just above @Hedgeye TREND on Friday after closing up +2.5% on the week to +10.7% YTD 

With Trump tweeting that a “deal with China is closer than ever” (very simple and concise big man!), the Fed having turn-tailed dovish, and the ECB ringing the #cowbell, why don’t we just “buy stocks”? 

As anyone who chased the early 2001 and 2008 epic US stock market bounces knows, it’s not always that easy. Central Banks (and US Presidents) leading stock market rallies as economies are #slowing isn’t new either. 

After major economies like Italy and USA hit #Quad4 in Q4, central banks went dovish in a hurry. What happens if an economy either stays in Quad 4 or moves to Quad 3? You don’t get an economic acceleration. You get stagflation and a profit squeeze. 

That’s why Oil and Energy Stocks (XLE) go from the worst place to be in Quad 4 to a great place during Quad3 (reflation): 

A) Oil (WTI) was up another +5.8% last week to +21.9% YTD and just moved above @Hedgeye TREND resistance
B) Energy Stocks (XLE) were up another +5.1% last week to +15.3% YTD and are currently Bullish TREND @Hedgeye 

At +3.9% on the week, HIGH BETA, as a US Equity Factor Exposure, loved the central banking #cowbell too. What stops that? Either gravity (time and space) or nothing. 

If nothing stops it, this must be the new beginning of the Old Bull Market. Only problem with that is the minor detail that the USA had #GrowthAccelerating for a record 9 straight quarters into the best EPS acceleration of the modern era. 

And that both Treasury Bonds and Gold continue to signal Bullish @Hedgeye TREND too… 

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

UST 10yr Yield 2.60-2.73% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (neutral)
REITS (VNQ) 81.86-85.40 (bullish)
Housing (ITB) 33.01-35.87 (bullish)
DAX 105 (bearish)
VIX 14.65-19.99 (bullish)
USD 95.75-97.30 (bullish)
EUR/USD 1.11-1.14 (bearish)
USD/YEN 109.50-111.13 (bearish)
GBP/USD 1.27-1.30 (bearish)
Gold 1 (bullish) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Central Banks Leading? - Chart of the Day