Free-Money Markets? Still #Slowing

“Despite the widespread acceptance of the free-market system, markets are rarely left entirely free.”
-Howard Marks 

As Howard Marks goes on to discuss in Chapter V of Mastering The Market Cycle, “perhaps the most important form of government involvement comes in the attempts of central banks to control and affect the ups and downs of economic cycles.” (pg 68)

The attempts, of course, aren’t always successful. In fact, they often see early “success” (in terms of market response) then ultimately fail as the girth of The Cycle trumps the almighty government hand attempting to bend and smooth economic gravity.

We saw that on Friday with more USA #Slowing data with the ISM slowing below its DEC low to 54.2 (well off the #PeakCycle print of 60.8 in AUG 2018) and 77% of the countries we model reporting TRENDING #decelerations on their PMIs for FEB 2019 as well.

Back to the Global Macro Grind…

Welcome to Macro Monday @Hedgeye where the Data Dependents get all fired up to wake up to some measuring and mapping of The Cycle vs. Old Wall hopes, narratives, and tweets.

As is customary in ROC (rate of change) terms, let’s start with contextualizing the weekly moves in the Global Currency market:

1. US Dollar Index was flat last week at +0.4% YTD and remains Bullish @Hedgeye TREND
2. EUR/USD was +0.3% last week at -0.9% YTD but remains Bearish TREND @Hedgeye
3. YEN was down -1.1% vs. USD last week to -2.0% YTD and moves back to Bearish TREND @Hedgeye
4. GBP/USD was +1.1% last week at +3.5% YTD and remains Bullish TREND @Hedgeye
5. Canadian Dollar was -1.2% vs. USD last week to +2.6% YTD but remains Bullish TREND @Hedgeye
6. Argentine Peso was down another -1.6% vs. USD last week to -5.6% YTD and remains Bearish TREND @Hedgeye
7. Thai Baht was down -1.6% vs. USD last week to +1.6% YTD and remains Bearish TREND @Hedgeye

With the biggest Old Wall narrative being the “China trade deal” being bullish for everything, it was interesting to see both the Asia currency and equity market #divergences vs. the storytelling last week: 

1. Chinese Stocks (Shanghai Comp) ramped +6.8% last week to +20.1% YTD and moving back to Bullish TREND @Hedgeye
2. South Korean Stocks (KOSPI) dropped -1.8% last week to +9.0% YTD and remain Bearish TREND @Hedgeye
3. Philippines’ Stock Market got smoked for a -4% loss last week (+2.4% YTD) and moved back to Bearish TREND @Hedgeye 

I’m not just cherry picking a few markets in Asia. Emerging Markets that, ostensibly, would be massive and huge and awesome recipients of the Trumpeted “trade deal” were also down on the “news” last week:

1. Emerging Market Equities (MSCI) corrected -0.7% last week to +8.9% YTD and remain Bearish TREND @Hedgeye
2. EM LATAM (MSCI) dropped -4.3% last week to +8.2% YTD and remains Bearish TREND @Hedgeye
3. Brazilian Stocks fell –3.4% last week to +7.6% YTD and are back to Bearish TREND @Hedgeye
4. Mexican Stocks were down -2.6% last week to +2.4% YTD are back to Bearish TREND @Hedgeye 

Part of the EM weakness was due to a US Dollar that won’t go bearish but another big part of the aforementioned point on 77% of the countries seeing continued economic #slowing is that Brazil and Mexico were part of that data driven reality last week.

I know. I know. The Chinese are going to buy a lot of soy and corn. But, evidently, US Ag prices didn’t go up on that either last week. Corn was down another -3% last week to -2.6% YTD and remains Bearish TREND @Hedgeye.

The Chinese are buying (and hoarding) lots of physical Gold too, but the price of Gold finally corrected -2.6% last week too. Most of the Gold weakness was due to Real Rates rising:

1. UST 2yr Yield popped +6 basis points last week to 2.55% but remains Bearish TREND @Hedgeye
2. UST 10yr Yield bounced +10 basis points last week to 2.76% but remains Bearish TREND @Hedgeye

Putting that bond market move in @Hedgeye TRENDING context, that was only the 5^th up week for the UST 10yr Yield in the last 17 weeks, so we’ll register that as a buying opportunity in everything we like right now (Treasuries, Gold, REITS, Housing (ITB), etc.). 

Looking at US Equity Sector Styles last week:

1. REITS (VNQ) corrected -1.6% last week to +12.3% YTD and remain Bullish TREND @Hedgeye
2. Tech Stocks (XLK) were up +1.0% last week to +15.1% YTD and are back to Bullish TREND @Hedgeye
3. Energy Stocks (XLE) reflated another +1.1% last week to +15.9% YTD and remain Bullish TREND @Hedgeye 

As the US goes into a better kind of #GrowthSlowing Quad (i.e. Quad 3) vs. the Quad 4 growth and inflation slowing conditions of Q4, all 3 of the aforementioned Sector Styles are net LONGs. 

In 2 of those 3 (REITS and Energy) sectors, back-tested historical returns tell us  that’s where we market people get paid during economic stagflation, whereas that’s where the poorer people foot the bill.

Not many at the Fed want to talk about that part of the free-money markets story… but The People rarely aren’t left holding the bag. 

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

UST 10yr Yield 2.60-2.79% (bearish)
UST 2yr Yield 2.44-2.56% (bearish)
SPX 2 (neutral)
NASDAQ 7 (bullish)
REITS (VNQ) 82.94-85.55 (bullish)
Housing (ITB) 34.01-36.19 (bullish)
Energy (XLE) 64.02-66.97 (bullish)
Shanghai Comp 2 (bullish)
USD 95.75-97.11 (bullish)
EUR/USD 1.12-1.14 (bearish)
USD/YEN 110.11-112.20 (bullish)
GBP/USD 1.29-1.33 (bullish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer