“I am… inevitable.”
If you haven’t seen Avengers: Endgame yet, I won’t ruin the surprise on how Tony Stark responds to Thanos… but I want to remind you that if Quad 4 is inevitable in the USA in Q3, you should not be surprised to see a 2019 Fed rate cut.
Back to the Global Macro Grind…
Welcome to Macro Tuesday @Hedgeye! As a matter of #process, on the first day of every week we review the prior week’s macro market moves within the context of our multi-factor, multi-duration, risk management model.
Let’s start with the macro market’s version of the Infinity War (Global Currency market):
- US Dollar Index corrected -0.4% last week to +1.5% YTD and remains Bullish TREND @Hedgeye
- EUR/USD bounced +0.4% last week to -2.3% YTD and remains Bearish TREND @Hedgeye
- YEN was up another +0.7% vs. USD last week to +0.3% YTD and remains Bullish TREND @Hedgeye
- GBP/USD was down another -0.1% last week to -0.3% YTD and remains Bearish TREND @Hedgeye
- Brazilian Real bounced +1.8% vs. USD last week to -3.5% YTD and remains Bearish TREND @Hedgeye
- Chinese Yuan was up +0.3% vs. USD last week to -0.3% YTD and remains Bearish TREND @Hedgeye
With the 1st Chinese bank seizure in 20 years this weekend, the PBOC opted for a 150B CNY injection and continue to vow to defend the its own FX universe at 7.00 CNY/USD.
Despite USD correcting last week, it was a Quad 4 week for Commodities (ex-Corn and Wheat):
- CRB Commodities Index was down another -1.3% last week to +5.2% YTD and remains Bearish TREND @Hedgeye
- Oil (WTI) broke bad to Bearish @Hedgeye TREND with a -6.8% drop last week
- Copper was down another -1.4% last week to +2.2% YTD and remains Bearish TREND @Hedgeye
Meanwhile both Gold and Bitcoin were UP +0.6% and +14.2% respectively, last week. Apparently they both like it when both the USD and UST Treasury Yields go down at the same time:
A) UST 2yr Yield dropped another -3 basis points last week to -32bps YTD and remains Bearish TREND @Hedgeye
B) UST 10yr Yield dropped another -7 basis points last week to -36bps YTD and remains Bearish TREND @Hedgeye
When Treasury bond yields are bearish, Treasury Bonds are bullish. Being long of both Treasuries (across the curve) and Bond Proxies like Utilities (XLU) remain core TRENDING asset allocations since late SEP of 2018.
The Valuation Experts who have hated Utilities the whole way up “because they’re expensive” had another tough week last week with Utes (XLU) making multiple all-time highs. From a US Equity Sector Style perspective, it was all Quad 4 last week:
- Utilities (XLU) were up another +1.8% last week to +13.1% YTD and remain Bullish TREND @Hedgeye
- REITS (VNQ) were up +0.2% last week to +18.1% YTD and remain Bullish TREND @Hedgeye
- Healthcare (XLV) was +1.3% last week to +3.5% YTD moving back to Bullish TREND @Hedgeye
As a reminder on the Quad 3 to Quad 4 Sector Pivots, Healthcare (Big Pharma in particular) moves from a SHORT to a LONG in Quad 4. So The Machine bought that Sector Style right on time.
In terms of Sector Styles that don’t work in Quad 4:
A) Energy Stocks (XLE) got tagged for a -3.3% loss last week and broke bad back to Bearish TREND @Hedgeye
B) Tech Stocks (XLK) got bagged for -2.8% loss last week and also broke bad back to Bearish TREND @Hedgeye
This, of course, made the SP500 drop back to Bearish @Hedgeye TREND last week. Unlike the Russell 2000 (IWM), which is a SHORT in Quad 3, the SP500 is only an outright SHORT in Quad 4.
In addition to being underweight and/or short SMALL CAP (down another -2.0% last week and down -7.7% for May to-date), you also want to be short HIGH BETA as a Factor Exposure in Quad 4.
HIGH BETA was down another -2.2% last week and is down -8.6% for May to-date. I guess being long “expensive” Utilities (XLU) has its perks when consensus was chasing what they thought were “cheap” High Beta Semiconductor stocks in April.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.26-2.44% (bearish)
UST 2yr Yield 2.10-2.25% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 57.65-60.40 (bullish)
REITS (VNQ) 86.15-88.66 (bullish)
VIX 14.01-20.02 (bullish)
USD 96.87-98.17 (bullish)
EUR/USD 1.11-1.13 (bearish)
USD/YEN 109.02-110.43 (bearish)
GBP/USD 1.25-1.28 (bearish)
Oil (WTI) 57.64-61.55 (bearish)
Gold 1 (bullish)
Copper 2.63-2.77 (bearish)
Bitcoin 6 (bullish)
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer