“We must operate with partial knowledge, and be provisionally content with probabilities.”
After spending some quality family time exploring the American West, it’s good to be back in my Connecticut saddle this morning! The aforementioned quote came from one of the classic books I read on vaca: The Lessons of History.
Back to the Global Macro Grind…
It’s what we call Macro Monday @Hedgeye. On the first day of every week we do our best to take the partial knowledge the market gives us and frame it up within the lens of our multi-factor, multi-duration risk management model.
Let’s start with the Global Currency market and the Quad 4 Summer Heat it continues to convey:
- US Dollar Index was up +0.4% last week to +1.0% YTD and back to Bullish TREND @Hedgeye
- EUR/USD was down another -0.4% last week to -2.1% YTD and remains Bearish TREND @Hedgeye
- Yen was +0.2% vs. USD last week to +1.8% YTD and remains Bullish TREND @Hedgeye
- GBP/USD was down another -0.6% last week to -2.0% YTD and remains Bearish TREND @Hedgeye
- Argentina’s Peso was down -1.7% vs. USD last week to -11.3% YTD and remains Bearish TREND @Hedgeye
- Pakistan’s Rupee was down -1.0% vs. USD last week to -13.2% YTD and remains Bearish TREND @Hedgeye
Don’t want partial knowledge of every other economy’s economic data, policy “responses”, and competitive devaluations vs. USD? No worries. We’ll keep measuring and mapping the Global Economy consistently and thoroughly.
With a stronger US Dollar came weaker leading indicators for US Inflation (i.e. Quad 4 in Q3)
- Commodities (CRB Index) deflated another -3.1% last week and remain Bearish TREND @Hedgeye
- Oil (WTI) deflated another -7.6% last week to -11.5% year-over-year = Bearish TREND @Hedgeye
- Natural Gas deflated another -8.2% last week to -18.4% YTD and remains Bearish TREND @Hedgeye
- Corn deflated -5.1% last week moving back to Bearish (from Bullish) TREND @Hedgeye
- Wheat deflated another -3.9% last week to -4.9% YTD and remains Bearish TREND @Hedgeye
If you’ve been long a currency that many still consider a commodity (i.e. Gold), well done.
Gold was up another +1.0% last week to +13.4% on a year-over-year basis (1 year ago is when it started to price in that Real Yields were cyclically peaking alongside cyclical inflation expectations).
On that Real Yields point (which Gold competes with as it only has an absolute return), Gold enjoyed yet another down week for both US and Global Sovereign Bond Yields while US High Yield got Quad 4’d too:
- UST 2yr Yield dropped -3 basis points to +1.82% (short-term Treasuries remain Bullish TREND @Hedgeye)
- UST 10yr Yield dropped -7 basis points to 2.06% (long-term Treasuries remain Bullish TREND @Hedgeye)
- High Yield OAS Spread WIDENED +13 basis points to +3.84% (JNK Short vs. EDV, TLT, and SHY Long)
Finally on “stocks”, in US Equity Sector Style terms, it was largely a Quad 4 week as well:
A) Energy Stocks (XLE) led losers with a -2.6% loss last week and remain Bearish TREND @Hedgeye in Quad 4
B) Utilities (XLU) were only down -0.4% last week and remain Bullish TREND @Hedgeye during Quad 4
C) Consumer Staples (XLP) led gainers at +0.2% last week and remain Bullish TREND @Hedgeye during Quad 4
In Factor Exposure terms, the market’s Quad 4 message was similar:
A) SMALL CAP (Russell 2000) was down another -1.4% last week and remains Bearish TREND @Hedgeye
B) HIGH DEBT to EV Stocks were down -1.7% last week and remain Bearish TREND @Hedgeye
C) HIGH SHORT INTEREST Stocks were down -1.6% last week and remain Bearish TREND @Hedgeye
From a Factor Exposure perspective, if the absolute and relative return of the FACTOR is negative on a duration of 3 months or more, I call that a Bearish @Hedgeye TREND.
In sharp contrast to something like BIG CAP QUALITY (low short interest) where LARGE CAP is +3.7% in the last 3 months and LOW SHORT INTEREST is +4.7%, SMALL CAP and HIGH SHORT INTEREST are down -4.5% and -3.1%, respectively.
Again, there’s always partial knowledge to be found somewhere. The more you know about that in macro, the higher the probability that you don’t lose money being LONG the things that are losing other people money during Quad 4.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.99-2.15% (bearish)
UST 2yr Yield 1.75-1.92% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8067-8274 (bullish)
Utilities (XLU) 60.06-61.42 (bullish)
Shanghai Comp 2 (bearish)
VIX 12.00-16.09 (neutral)
USD 96.08-97.29 (bullish)
EUR/USD 1.11-1.13 (bearish)
USD/YEN 107.01-108.99 (bearish)
GBP/USD 1.24-1.26 (bearish)
Oil (WTI) 54.19-58.20 (bearish)
Nat Gas 2.20-2.50 (bearish)
Gold 1 (bullish)
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer