“Just don’t cheat.”
-Robert Federer
In a great opening chapter of Range titled “Roger vs. Tiger” that was Roger Federer’s Dad’s only rule if he wanted to play tennis. Even though she was a tennis coach, Federer’s Mom (Lynette) didn’t even want to coach her son:
“He tried out every strange stroke and certainly never returned a ball normally. That is simply no fun for a mother” (pg 3).
For investors, Quad 4 is not fun for a lot of people either. There are plenty of moves within moves. Last week’s was what we call a classic Counter @Hedgeye TREND move. We won’t coach you to chase those. We fade them.
Back to the Global Macro Grind…
With the summer heating up here on the East Coast, welcome to Macro Monday! As a matter of #process, on the 1st day of the week we review last week’s macro market moves within the context of @Hedgeye TRENDs.
It was a Counter @Hedgeye TREND week in the Global Currency market:
- US Dollar Index corrected -1.2% last week to +0.4% YTD but remains Bullish TREND @Hedgeye
- EUR/USD bounced +1.5% last week to -1.2% YTD but remains Bearish TREND @Hedgeye
- Yen was +0.1% vs. USD last week to +1.3% YTD and remains Bullish TREND @Hedgeye
- GBP/USD bounced +0.9% last week to -0.1% YTD but remains Bearish TREND @Hedgeye
- South African Rand dropped another -2.5% vs. USD last week to -3.9% YTD = Bearish TREND @Hedgeye
- Chinese Yuan was -0.1% vs. USD last week to -0.5% YTD and remains Bearish TREND @Hedgeye
While I guess Macro Tourists were really into the Mexican trade deal catalyst, that didn’t change what’s been happening in China (Quad 3 economic #slowing) and/or in the European economy for that matter.
What’s the catalyst for a real USD break-down? There’s a multi-factor answer to that which would include both a Chinese and European economic recovery and USA NOT being in Quad 4 for Q3 (USD’s highest expected value = Quad 4).
Is that why both EM and China didn’t participate in The New Hope (Fed Cuts) rally last week?
- Chinese Stocks (Shanghai) were down another -2.5% last week and remain Bearish TREND @Hedgeye
- EM (MSCI) was only +0.9% (despite Down Dollar) to +4.3% YTD and remains Bearish TREND @Hedgeye
Despite Down Dollar, ex-Gold (which is more of a currency than a commodity, up another +2.7% last week and remains Bullish TREND @Hedgeye) the Commodities market didn’t have a Counter TREND #bounce either:
- CRB Commodities Index was down another -0.5% last week and remains Bearish TREND @Hedgeye
- Oil (WTI) only managed a +0.9% bounce (-14.1% y/y) and remains Bearish TREND @Hedgeye
- Copper was down another -0.5% last week (-21.6% y/y) and remains Bearish TREND @Hedgeye
- Natural Gas deflated another -4.8% last week to -15.3% YTD and remains Bearish TREND @Hedgeye
- Soybeans were down another -2.5% last week to -7.0% YTD and remain Bearish TREND @Hedgeye
Put simply, that move in Commodities (and Chinese Imports being DOWN -8.5% y/y in May) only makes our Quad 4 in Q3 call a “higher conviction” one vs. when I was writing to you at this time last week. US Inflation #slowing = Q3.
The Bond market obviously gets that:
- UST 2yr Yield down another -7 basis points last week to 1.85%
- UST 10yr Yield down another -4 basis points last week to 2.08%
But High Yield (bonds) and “stocks” went up because of that economic reality, for a TRADE…
- High Yield OAS (spread) came in -26 basis points to 4.07%
- SP500 had its 1st up week in 5, +4.4% but remains Bearish TREND @Hedgeye
- Russell 2000 was +3.3% last week but is still down -13.0% from Q318 and remains Bearish TREND @Hedgeye
At the Sector Style level, two of the bigger selling opportunities born out of that Counter TREND bounce are:
- Materials (XLB) stocks which were up +9.1% on the week signaling immediate-term #overbought
- Tech (XLK) stocks which were +6.0% on the week signaling immediate-term #overbought
And, from a Factor Exposure perspective, the biggest bounces (vs. May’s lows) were Counter TREND as well:
- HIGH BETA stocks led the bounce at +5.5% on the week (but are down -4.3% in the last month)
- SMALL CAP stocks were +4.8% on the week (but are down -4.5% in the last month)
*Mean performance of Top Quartile vs. Bottom Quartile, SP500 companies
Yeah, I think I hear you… “but, but, but – you were right KM, the Fed is going to cut… and I can’t fight the Fed… and I can’t have another month like May… but I want to have more Counter TREND weeks like I could have had last week…”
But you can’t cheat and have everything “priced-in” without anything happening (economically) yet…
Unfortunately, the Fed can’t print Q2 earnings season… and with a 90% probability of a July Fed Cut priced-in, what happens if they don’t cut on time (or by enough) either? Don’t forget market history on the #GrowthSlowing front.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.02-2.29% (bearish)
UST 2yr Yield 1.71-2.05% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 58.41-60.95 (bullish)
REITS (VNQ) 85.75-89.53 (bullish)
Shanghai Comp 2 (bearish)
VIX 15.05-20.31 (bullish)
USD 96.25-98.40 (bullish)
EUR/USD 1.11-1.13 (bearish)
USD/YEN 107.37-109.90 (bearish)
GBP/USD 1.25-1.27 (bearish)
Oil (WTI) 49.55-58.12 (bearish)
Nat Gas 2.23-2.52 (bearish)
Gold 1 (bullish)
Copper 2.61-2.71 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
