US STRATEGY – GLOBAL RISK AVERSION

The market came under pressure on Tuesday as one of our 2Q themes Sovereign Debt Dichotomy continues to gain momentum and drive incremental volatility. As a result, there was a significant pickup in RISK AVERSION trade associated with skepticism surrounding the ability of the issues Greece in facing spreading to the rest of the world.

 

On the heels of that trade, the VIX was up 18% yesterday and 36.5% over the past month. The Hedgeye Risk Management models have levels for the VIX at: buy Trade (19.41) and sell Trade (25.08).

 

We have been very vocal about the mounting sovereign solvency issues in Europe.  In many ways, the European crisis echoes the way the U.S. banking crisis brought the global banking system to its knees.  At that time, the global monetary policy-makers allocated trillions to prevent systemic collapse.  In total, the sovereign debt crisis in Europe could also pose the threat of systemic collapse.  As with the U.S. banking crisis, I expect that everything possible will be done to prevent that type of massive melt down. 

 

 As a result, U.S. fiscal stability is the key to keeping global systemic risk in check.  Unfortunately, our balance sheet issues are very much the same as those facing the PIIGS. Despite this, the dollar is a beneficiary of the RISK AVERSION trade rising 1.25% yesterday. The Hedgeye Risk Management models have levels for the DXY at: buy Trade (82.05) and sell Trade (83.39).

 

The MACRO calendar was a tailwind, but failed to offer any reprieve for stocks as better-than-expected March factory orders help to put the REVCOVERY trade on solid footing. In addition, pending home sales were surged on the expiration of the homebuyer tax credit.

 

The low beta defensive sectors such as Healthcare (XLV), Consumer Staples (XLP) and Utilities (XLU) were the relative outperformers yesterday. The commodity equities saw outsized losses on a dollar rally and a 2.3% decline in the CRB. The Materials (XLB) sector suffered its biggest one-day pullback since February 4th. Along with the macro headwinds from Greece and Spain, Copper is BROKEN and worries that China may be gaining some traction in its efforts to dampen liquidity also seemed to weigh on the sector.

 

In early trading, oil is trading down nearly 1.4% after suffering a 4% decline yesterday on the heels of increased tightening in China and a pickup in the RISK AVERSION trade with the dollar advancing 1.25% on the day. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (81.67) and Sell Trade (84.63).

 

Yesterday, copper suffered a similar fate to oil as global RISK AVERSION and incremental tightening in China facilitated a decline of 3.5%. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.16) and Sell Trade (3.35).

 

In early trading, gold is trading down slightly, down 0.15%. This is following a 1.2% decline yesterday on dollar strength. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,165) and Sell Trade (1,188).

 

In early trading, equity futures are trading flat to fair value as some stability returns to markets after Tuesday's dramatic decline. At 8:15 the ADP jobs data will be monitored for a potential positive reading as it has become a proxy for non-farm payrolls which are due on Friday. As we look at today’s set up the range for the S&P 500 is 22 points or 0.3% (1,170) downside and 1.6% (1192) upside.

 

Today’s MACRO events: 

  • MBA Mortgage Applications
  • April Challenger Job Cuts
  • April ADP Employment
  • April ISM Non-Manufacturing Composite 

Howard Penney

Managing Director

 

US STRATEGY – GLOBAL RISK AVERSION - S P

 

US STRATEGY – GLOBAL RISK AVERSION - DOLLAR

 

US STRATEGY – GLOBAL RISK AVERSION - VIX

 

US STRATEGY – GLOBAL RISK AVERSION - OIL

 

US STRATEGY – GLOBAL RISK AVERSION - GOLD

 

US STRATEGY – GLOBAL RISK AVERSION - COPPER


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