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    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

US equities finished lower last Friday, partly on Fitch’s Spain debt downgrade.  It’s truly amazing that the Fitch, Moody’s, or S&P ratings can still have this type of impact on the market.  After a long weekend, we are looking at growth slowing around the world and markets in a steep dive.

China’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April that was less than the median 54.5 estimate in a Bloomberg survey.  Also, the Eurozone manufacturing PMI declined to 55.8 in May from 57.6 in April (also below an initial estimate of 55.9 released on May 21).  In early trading, the euro is trading down 1.3% to 1.2131.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).

Over the weekend, Germany’s president unexpectedly quit, making Germany less of a source of stability in the region.  The now former president, Horst Koehler, is also the former head of the International Monetary Fund.

This follows on the heels of some disappointing MACRO data points in the US last week.  Breaking a four-month upward trend, consumer spending failed to deliver in April; spending was flat versus expectations for +0.3% and personal income met consensus at +0.4%.  Also on Friday, May Chicago PMI was reported at 59.7; below consensus 61.0 and prior 63.8. The one bright-spot was the Final May University of Michigan Confidence of 73.6; slightly better than consensus 73.3 - the preliminary reading was 73.3.

On Friday, Financials (XLF), Energy (XLE) and Materials (XLB) were the three worst performing sectors, down 2.2%, 1.9% and 1.8%, respectively.  The XLE Oil services stocks (OSX down 5.2%), were the worst performing sub-sector on the day.   Late Friday afternoon, President Obama addressed the media from Louisiana, where he pledged the full force of the government in responding to the continuing oil spill and cleanup. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.46) and Sell Trade (77.32).

The theme of slowing growth is negatively impacting China and commodity prices.  Over the last two days, China is down 3.3%.  In early trading today, copper and crude prices are down more than 2%.  The XLE and XLB will continue to underperform in this environment.    The Hedgeye Risk Management models have the following levels for COPPER – Buy Trade (3.02) and Sell Trade (3.20).    

In early trading, the dollar is trading up about 1%.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (86.49) and Sell Trade (87.51). 

The three defensive sectors of the S&P 500 outperformed on Friday - Consumer Staples, Healthcare and Utilities.  Large-cap Pharma, HMO’s and beverages were all sectors that rose on Friday. 

Despite more instability in the euro zone region, the VIX declined 20% last week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (28.65) and Sell Trade (45.06). 

Gold has rallied 2.3% last week and is now up 11.3% year-to-date.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,194) and Sell Trade (1,231).

As we look at today’s set up for the S&P 500, the range is 50 points or 1.2% (1,076) downside and 3.4% (1,126) upside.  Equity futures are trading below fair value with the Dow back below 10,000 in reaction to further selling in global equities as global growth is slowing. 

On the economic front, to be reported today are:

  • May ISM Manufacturing
  • April Construction Spending
  • May Dallas Fed Manufacturing
  • API Crude Inventories
  • ABC Consumer Confidence

Howard Penney

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - S P

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - DOLLAR

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - VIX

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - OIL

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - GOLD

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - COPPER