Quad 3 Week, It Was

“Keep calm and camp on.”
-Canadians

If you’re already out at what we Canadians call “camp” for the summer, enjoy eh. If you’re married and already sent your kids away to camp, enjoy your newfound time and space too!

Up north, Canadians with camps also have quads. Not to be confused with The Quads (our 4 Quadrant GIP measuring and mapping #process), quads are ATVs. Americans obviously have these as well (usually more expensive ones!).

But does every American, Canadian, European, etc. investor know what Quad their respective economies are in? Nope. If they do, do they embrace the uncertainty associated with the basic fact that the Quads can change? They should.

Back to the Global Macro Grind…

Welcome to your summer edition of Macro Monday @Hedgeye! On the 1^st day of the week we review what happened in macro markets in the week prior and contextualize those moves within our multi-duration TRADE, TREND, TAIL model.

As we close out Q2 of 2019, a Quad 3 in Q2 week it was. I know, I know… lots of people would prefer if we don’t do the Quad 4 in Q3 summer-thing. I guess a credible market case is being made that the Fed can eliminate that type of economic gravity.

What does a successful Quad 3 rate-cutting Fed look like in macro market terms?

1. Down Dollar
2. Down Rates
3. Up Oil, Commodities, and “Stocks”

Unlike in May (and during Quad 4 in Q4 of 2018), that’s what we had last week with markets pricing in a 100% probability of a PE Powell summer-time rate cut in July.

Let’s review that in Global Currency terms:

1. US Dollar Index was down -1.4% last week to 0.0% YTD and moved to Neutral TREND @Hedgeye
2. EUR/USD was +1.8% last week to -0.9% YTD and remains Bearish TREND @Hedgeye
3. Yen was +1.2% vs. USD last week to +2.1% YTD and remains Bullish TREND @Hedgeye
4. GBP/USD was +1.2% last week to -0.1% YTD and remains Bearish TREND @Hedgeye
5. Argentine Peso was +3.1% vs. USD last week to -12.0% YTD and remains Bearish TREND @Hedgeye
6. Turkish Lira was +1.4% vs. USD last week to -9.1% YTD and remains Bearish TREND @Hedgeye

Neutral TREND is as neutral does until the Fed confirms or denies its commitment to devalue the purchasing power of The American People. And, no, don’t expect either PE Powell or Larry Kudlow to take any responsibility for doing such a thing.

The way the math works is Down Dollar makes everything you buy in Dollars go up in price. If you don’t like higher gas prices and a higher cost of living, too bad. Eat it. Here’s what Commodities did last week:

1. CRB Commodities Index (19 commodities) reflated +2.2% last week but remain Bearish TREND @Hedgeye
2. Oil (WTI) reflated +8.8% last week but remains Bearish TREND @Hedgeye (down -5.5% year-over-year)
3. Copper reflated +2.8% last week but remains Bearish TREND @Hedgeye (down -13.3% year-over-year)
4. Natural Gas continued to #crash, -8.4% last week to -20.8% YTD and remains Bearish TREND @Hedgeye
5. Cattle was down another -2.0% last week to -10.5% YTD and remains Bearish TREND @Hedgeye

In other words, what bounced in Dollar terms did so within ongoing Bearish @Hedgeye TRENDs. And what didn’t have a Counter @Hedgeye TREND bounce (Nat Gas and Cattle) continues to signal Quad 4 in Q3.

Yep. That means Powell needs to do more. Must have moarrr summer-time #cowbell!

Selfishly, I quite like what PE Powell is doing for my PA. Higher gas prices for my boat this summer be damned, eh. Long Utilities, REITS, Gold, and Treasuries helps me afford what the poor guys and gals down the lake have no hedges against.

I’m obviously saying that in jest, but it is true. We people on Wall Street have to be willfully blind, begging for more rate-cuts, and not take responsibility for the inequality gap an Easy Money Fed continues to perpetuate.

In interest rate terms, here’s how that “Easy Money Is Back!” (cover of Barron’s this weekend) looked:

1. UST 2yr Yield dropped another -7 basis points last week to 1.77% (short-term Treasuries = Bullish TREND @Hedgeye)
2. UST 10yr Yield dropped another -3bps last week to 2.05% (long-term Treasuries remains Bullish TREND @Hedgeye)
3. High Yield OAS Spread tightened -34bps last week to 3.61% (High Yield is back to Bullish TREND @Hedgeye)

Oh yeah, baby. High Yield Spread risk never has to happen, ever, again, eh! Seriously, even if we have an #EarningsRecession, all good, eh. Zombify all of the credit risk associated with cash flows slowing to negative on a year-over-year basis.

The People who are going to get fired (rising Jobless Claims) when cash flows go negative don’t matter to consumer spending, do they? Admittedly, I shorted High Yield (HYG) for the 1^st time this year on last week’s #overbought signal.

How about “stocks”? Even though the Russell (IWM) was a great short at its intra-week high and is still down  -11% from where The Cycle peaked back in Q3 of 2018, it was +1.8% last week (down -8.2% year-over-year).

In terms of Sector Styles a Quad 3 week, it was too:

1. Energy (which loves Quad 3) led the bounce at +4.2% on the week but remains Bearish @Hedgeye TREND
2. Tech (The Cloud loves Quad 3!) was +2.9% on the week but remains Bearish TREND @Hedgeye
3. Materials (XLB) which are not good in Quad 3 were DOWN -0.4% last week and remain Bearish TREND @Hedgeye
4. Financials (XLF) which aren’t good in Quad 3 either were -0.1% last week and remain Bearish TREND @Hedgeye

Long Gold (+4.1% last week and +7% year-over-year) instead of US Bank Stocks? Well done. It’s not just the blue collar guys and gals down the lakeshore who are going to be hurting if the Fed devalues the Dollar and cuts rates to zero! #BankersToo

In terms of International Equities, they loved the Down Dollar Quad 3 move too:

1. Chinese Stocks (Shanghai Comp) bounced +4.2% last week but remain Bearish TREND @Hedgeye
2. Emerging Markets (MSCI) bounced +3.8% last week but also remain Bearish TREND @Hedgeye

So we know what we want to buy for Quad 3 in Q4 (everything that worked last week), but we don’t really want to deal with Quad 4 again in Q3, eh? Too many eh’s this morning, eh? Dealing with The Quads shifting this summer might be too bad too!

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

UST 10yr Yield 1.98-2.16% (bearish)
UST 2yr Yield 1.70-1.93% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (neutral)
Utilities (XLU) 59.26-61.60 (bullish)
REITS (VNQ) 88.48-91.80 (bullish)
Financials (XLF) 26.55-27.45 (bearish)
Shanghai Comp 2 (bearish)
VIX 14.29-18.36 (neutral)
USD 95.62-96.95 (neutral)
EUR/USD 1.11-1.14 (bearish)
USD/YEN 107.13-108.90 (bearish)
GBP/USD 1.25-1.28 (bearish)
Oil (WTI) 49.99-58.13 (bearish)
Nat Gas 2.14-2.36 (bearish)
Gold 1 (bullish)
Copper 2.61-2.73 (bearish)

Best of luck out there this week,
KM 

Keith R. McCullough
Chief Executive Officer