“The slammed-shut phase of the credit cycle probably does more to make bargains available…”
-Howard Marks 

I’ll wait for Howard Marks to chime in on what he thinks about Quad 4 economic and market conditions. In the meantime, I’d say May 2019 qualifies as slamming-shut The Cycle of complacency and performance chasing that we saw in April. 

With High Yield OAS Spread ramping another +40 basis points last week to 4.33%, I still think this Quad 4 Scare in Q3 combined with NEGATIVE year-over-year SP500 profits in Q2/Q3 slams both credit and levered HIGH BETA exposures. 

What’s the catalyst to reverse it? A Trump/Xi meeting at the end of June? Oh boy. It’s a good thing Chinese trade relations went swimmingly again this weekend… 

Slammed-Shut #Quad4 - z 4E3DBDBD6 25C9 437A A460 C0E55CDC8D75

Back to the Global Macro Grind… 

It’s your first Macro Monday of the summer of 2019! Welcome back. 

For those of you who are new to data driven and apolitical measuring and mapping #process, on the 1st day of every week we review last week’s market moves within the context of intermediate-term @Hedgeye TRENDs. 

First up, the Global Currency market: 

  1. US Dollar Index was up another +0.1% last week to +1.6% YTD and remains Bullish TREND @Hedgeye
  2. EUR/USD was down another -0.3% last week to -2.6% YTD and remains Bearish TREND @Hedgeye
  3. YEN was up another +0.9% vs. USD last week to +1.2% YTD and remains Bullish TREND @Hedgeye
  4. Pound was down another -0.7% vs. USD last week to -1.0% YTD and remains Bearish TREND @Hedgeye
  5. Canadian Dollar was down -0.6% vs. USD last week to +0.9% YTD and remains Bearish TREND @Hedgeye
  6. Chinese Yuan was down -0.1% vs. USD last week to -0.4% YTD and remains Bearish TREND @Hedgeye 

If and when the Fed cuts rates, the Chinese should get a breather (they’re short of US Dollars) but, for now, with the Yuan down -7.2% year-over-year vs. USD, the PBOC can’t go “all-in” dovish like it did in 2016. That’s deflationary. 

The other thing that deflated last week was inflation expectations: 

  1. CRB Commodities Index was down another -1.8% to +3.3% YTD and remains Bearish TREND @Hedgeye
  2. Oil (WTI) got Quad 4’d for a -8.8% weekly drop to -14.9% y/y and remains a new Bearish TREND @Hedgeye
  3. Natural Gas deflated -6.0% last week to -11.1% YTD and remains Bearish TREND @Hedgeye
  4. Copper was down another -2.2% last week to 0.0% YTD and remains Bearish TREND @Hedgeye
  5. Cattle dropped another -4.5% last week to -9.7% YTD and remains Bearish TREND @Hedgeye
  6. Lumber deflated another -6.4% last week to -12.7% YTD and remains Bearish TREND @Hedgeye 

But Gold (+1.7% last week) and Corn (+5.6% last week) were up so it’s all good, eh? Only if you’re long of both Gold and Corn as they, in sharp contrast to the other 6 things on that list, remain Bullish TREND @Hedgeye. 

In related Quad 4 Scare news, US Treasury Yields got hammered last week: 

A) UST 2yr Yield was down -24 basis points to 1.92%, that’s down -57 basis points YTD
B) UST 10yr Yield was down -20 basis points to 2.12%, that’s down -56 basis points YTD 

And the MOVE (Treasury Bond Volatility Index) finally moved! It was +20% last week alone. 

As you can see in today’s Chart of the Day (slide 72 of the Q2 Macro Themes deck), when: 

A) High Yield OAS (spread) is rising (y-axis) and
B) The MOVE is moving out on the x-axis 

The Fed ultimately opts to cut interest rates… so give this (and US Equities falling) more time. 

Here were some US Equity market callouts last week: 

  1. SP500 down for the 4th straight week, down -2.6% to +9.8% YTD and remains Bearish TREND @Hedgeye  
  2. Russell (IWM) down -3.2% last week and -15.8% from where The Cycle peaked = Bearish TREND @Hedgeye
  3. Energy Stocks (XLE) led Sector Style losers down -4.6% last week to +2.5% YTD = Bearish TREND @Hedgeye 

Yep, it’s a good thing we stayed with the data-driven #process and sold both Tech and Energy. We remain short of the Financials (XLF down -3.2% last week) with rates falling Quad 4 in Q3 view too. 

At the Factor Exposure level, HIGH LEVERAGE joined HIGH BETA and SMALL CAP as losers: 

A) HIGH LEVERAGE (high Debt/EV) was down -3.7% last week and is down -7.9% in the last month
B) HIGH BETA was down another -3.7% last week and is down -11.5% in the last month
C) SMALL CAP was down another -4.4% last week and is down -11.0% in the last month
*Mean performance of Top Quartile vs. Bottom Quartile, SP500 companies 

From a Global Equity market perspective, Europe was a mess but EM showed bullish #divergences: 

  1. Germany’s DAX broke bad to Bearish @Hedgeye TREND at -2.4% last week
  2. Italy’s MIB Index dropped another -2.8% last week and remains Bearish TREND @Hedgeye
  3. The Hang Seng lost another -1.7% last week and remains Bearish TREND @Hedgeye
  4. Brazil’s Bovespa bounced +3.6% last week but remains Bearish TREND @Hedgeye
  5. Russia’s RTSI was up another +0.6% last week and remains Bullish TREND @Hedgeye
  6. India’s Sensex was up another +1.0% last week and remains Bullish TREND @Hedgeye 

So who’s long Treasuries (across the curve), Utes (XLU), Russia, India, and Gold? You’re certainly earning your performance fees vs. others who are seeing liquidity in high-beta-levered-long-inflation-expectations slammed-shut. 

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

UST 10yr Yield 2.07-2.39% (bearish)
UST 2yr Yield 1.90-2.15% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 57.30-60.28 (bullish)
Financials (XLF) 25.08-26.89 (bearish)
DAX 11611-12080 (bearish)
VIX 14.19-20.41 (bullish)
USD 97.07-98.26 (bullish)
EUR/USD 1.11-1.12 (bearish)
USD/YEN 108.23-110.12 (bearish)
GBP/USD 1.25-1.27 (bearish)
Oil (WTI) 55.27-60.20 (bearish)
Nat Gas 2.42-2.61 (bearish)
Gold 1 (bullish)
Copper 2.60-2.73 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

Slammed-Shut #Quad4 - Chart of the Day