US STRATEGY – SIGNS OF FATIGUE

The world’s economic recovery engine is slowing.  From the opening bell, the S&P was under pressure from the MACRO news coming from Asia and Europe.  Even the better-than- expected US economic data is not enough to pull this market out of bearish territory.  Not getting the attention that it should, the Bank of Canada raised its benchmark interest rate to 0.50% from 0.25% and the Reserve Bank of Australia left its cash rate unchanged at 4.5%.

Anyone that has been watching either the Chinese stock market or commodity prices for the last six weeks won’t be surprised that we received a couple of data points this morning that confirm economic growth is slowing incrementally in China.  Yesterday’s lower than expected reading for Chinese May manufacturing suggests that this growth has slowed more than anticipated (Chinese Ox in a Box).  China May manufacturing PMI was 53.9 vs. consensus 54.5 and prior 55.7. The official reading was reinforced by the HSBC China May PMI reading of 52.7 vs. prior 55.2. It was also reported that May property sales in several major Chinese cities had fallen significantly; providing evidence that the government’s tightening moves were impacting activity.

The Eurozone May Manufacturing PMI was 55.8 vs. consensus 55.9 and down from prior 57.6. The ECB warned that Eurozone banks are facing more losses and that write-offs could reach €195B. The ECB also commented that the financial sector and economy remain exposed to hazardous contagion effects from the sovereign debt crisis.  The Eurozone April unemployment crept up to 10.1% vs. consensus and prior 10.0%.

In reaction, the Euro traded down as low as $1.21, a four-year low, and was a leading cause for concern early in the day. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).

In the USA, a better-than-expected increase in April construction spending provided a temporary reprieve.  April construction spending was 2.7% month-over-month vs. consensus 0.0%; March was revised to 0.4% from 0.2%.  The May ISM manufacturing number indicated a slow down, but came in better than expected; 59.7 vs. consensus 59.0 and prior 60.4. May ISM prices paid was 77.5 vs. consensus 72.0 and prior 78.0. May ISM employment was 59.8 vs. prior 58.5.

The Dollar index traded higher yesterday by 0.34%.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.35) and Sell Trade (87.11).  The VIX rallied 10.8% yesterday and the Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (29.36) and Sell Trade (45.11). 

For the second day in a row, the two worst performing sectors were Energy (XLE) and Materials (XLB).  The XLE is under sustained pressure from the Gulf of Mexico oil spill; BP was down 15.0%, RIG down 11.9% and HAL down 14.8%. Servicers and drillers were down significantly, with the OSX down 7.51%. 

Yesterday crude dropped 1.8% to 72.58.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (68.01) and Sell Trade (75.34).

AAPL, MSFT and GOOG provided leadership that allowed Technology (XLK) to outperform.  AAPL reported that iPad sales have hit 2 million units. The Semis were lower on the day, with the SOX down 2.3%. 

Evidence that growth is slowing, especially in China, is dragging down the price of copper.  In early trading, copper fell for a third day to the lowest price in almost two weeks.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.92) and Sell Trade (3.03).    

The U.S. Mint sold 190,000 ounces of American Eagle gold bullion coins last month, the most since sales of 231,500 ounces in December.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,201) and Sell Trade (1,231).   

As we look at today’s set up for the S&P 500, the range is 32 points or 1.7% (1,052) downside and 1.2% (1,084) upside.  Equity futures are trading mixed to fair value, and off earlier highs. 

On the economic front to be reported today will be:

  • MBA Mortgage Applications
  • May Challenger Job Cuts
  • Apr Pending Home Sales
  • May domestic vehicle sales

Howard Penney

US STRATEGY – SIGNS OF FATIGUE - S P

 

US STRATEGY – SIGNS OF FATIGUE - DOLLAR

 

US STRATEGY – SIGNS OF FATIGUE - VIX

 

US STRATEGY – SIGNS OF FATIGUE - OIL

 

US STRATEGY – SIGNS OF FATIGUE - GOLD

 

US STRATEGY – SIGNS OF FATIGUE - COPPER