Sunday, December 08, 2019

 

Dear Reader,

 

Please find below our latest Weekly Trend Update Report covering major asset classes and currencies.

Have a nice week end.

 

Marc Bentin

 

 

 

       

Trend Status Update

 

The week started with a bang from the Trump tweeter feed as he opened two new fronts, announcing on Monday that Brazil and Argentina would lose exemptions from higher tariffs on steel and aluminium. At the same time, he announced that France could face 100% tariffs over its digital services tax, aiming at ensuring tech companies pay their fair share of corporate tax. France is seeking a solution to tax the behemoths at the OECD level and if that fails, it will act at the European level, supported by the UK (…), Spain, several other European countries and the new President of the European Commission.

The second punch came last week with D. Trump declaring that he was willing to wait until after next year’s presidential election to strike a limited trade deal with China, casting doubt on expectations for the upcoming Phase I of the US /China trade deal supposed to prevent the escalation of new tariffs on December 15^th.  He added perhaps disingenuously that he was not there to support stock prices…The following day, as a relief to stock markets, he inferred  the exact opposite that the US and China were moving closer to agreeing on the amount of tariffs that would be rolled back in a phase-one trade deal despite tensions over Hong Kong. It was said that D. Trump’s comments on Tuesday downplaying the urgency of a deal shouldn’t have been understood to mean that talks were stalling as he was speaking off the cuff… The stock market subsequently rallied, recovering all it had lost in the first two days of the week. The Chinese commerce ministry did say that tariffs must be cut if China and the United States are to reach an interim agreement on trade, sticking to a stance that some US tariffs must be rolled back for a phase One deal but the markets and the week ended on a strong note with sentiment  further jolted on Friday by the better than expected US job report, itself comforted by US shoppers spending $9.4bn online on Cyber Monday, up almost 20% from a year ago. This  outweighed evidence of a further slowing in US manufacturing for which D. Trump blamed the Fed (“Manufacturers are being held back by the strong Dollar, which is being propped up by the ridiculous policies of the Federal Reserve - Which has called interest rates and quantitative tightening wrong from the first days of Jay Powell!”).

Beyond the V shape recovery of stocks which remain in “Fomo & Tina” mode, the other “take away” from last  week was the Federal Reserve saying it was  considering introducing a rule that would let inflation run above its 2% target, a potentially significant shift in its interest rate policy which basically equates the central bank to consider a promise that when it misses its inflation target, it will then temporarily raise that target, to make up for lost inflation… This may translate into the Fed likely cutting one more time, probably not this year (after Friday’s job report, it would be odd) but next year and even more likely not reversing course at the first sign of the battle against deflation being won. If the Fed adopts this so-called ‘make-up strategy’, it would mark the biggest shift in interest rate policy since it began to target 2% inflation in 2012, the WSJ reported. Last Friday’s job numbers also showed tensions building in employment costs and commodities are doing a little bit more than stirring in the water as well which might challenge bond yields next year. Tariffs, deglobalisation, mounting wage pressures and rising commodities are not a recipe for continued deflation.  

At stock markets aim at breaking the ceiling, Morgan Stanley published a study last week arguing that more than a third of S&P 500 companies posted a year-over-year decline in earnings in 2019 which was last seen in 2009, 2008 and 2002, when the broader economy and the stock market fell. This time (with near zero interest rates and central banks balance sheet expansion) will be different and we can only assume that multiple expansion will be the only way forward to justify higher stock prices. For what it is worth, analysts are also slashing projections for Q4 earnings at a fast pace, making it more likely that a profit recession will hit Corporate America for the first time in four years with a drop of almost 1% from a year ago following a 1.3% decline for the previous quarter.

 

Over the past week, the S&P500 added 0,2% (26,0% YTD) while the Nasdaq100 closed unchanged on the week (32,9% YTD). The US small cap index gained 0,6% (21,6% YTD). In terms of sectorial performance, a shift occurred again favouring tech and growth over value with Apple and Google both ending the week in breakout mode. The Eurostoxx50 dropped -0,4% (25,7%), underperforming the S&P500 by-0,6%. XLF (FINANCIAL SELECT SECTOR SPDR) gained 0,7% (27,5%, Z-score 2,3) despite Moddy’s downgrading the sector outlook. Diversified EM equities (VWO) gained 1,4% (11,9%), outperforming the S&P500 by 1,2%. CSI300 Chinese equity index (ASHR) rallied 2,2% (28,5%). Indian shares (EPI) dropped -1,1% (-2,1%). Russian shares (RSX) gained 0,9% (30,5%). EWJ (ISHARES MSCI JAPAN ETF) responded favourably to the stimulus package, rallying 2,1% (19,7%, Z-score 2,9).

 

The Dollar DXY Index (UUP) dropped on the week by -0,5% (5,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (1,2%). EM currencies were mostly stronger. USDBRL sold off by -2,3% (6,6%, Z-score -2,0). USDRUB dropped -1,0% (-8,2%). USDMXN dropped -1,1% (-1,8%). USDINR dropped -0,7% (2,1%). USDCNY was unchanged (2,3%) while USDZAR dropped -0,3% (1,9%). The performance of the euro was mixed; EURUSD gained 0,4% (-3,5%). EURCHF dropped -0,6% (-2,7%). EURJPY dropped -0,4% (-4,5%) and EURGBP dropped -1,2% (-6,4%, Z-score -2,6) as opinion polls showed the UK Prime Minister B. Johnson still holding 10 points lead for next week’s elections. Japan’s Prime Minister Abe announced stimulus measures to support growth in an economy affected by an export slump, natural disasters and a recent sales tax increase. The total stimulus package amounted to around 26 trillion yen ($239bn) spread over the coming years. The stimulus could boost growth by about 1.4%, the draft document said, driving Japanese stocks to the top of the z-score report on Friday, also supporting the yen despite a global “risk on” wave. The euro remains the currency that nobody wants to own because it loses money standing still but it is interesting to note that the euro zone is emerging as the new global provider of liquidity to the international financial system, slowly replacing the dollar as more and more companies want to issue debt in euros. Our outlook remains bearish for the dollar going into next year (including against the euro) but it might not be worth trading just yet, as opposed to higher yielding non-USD alternatives from the EM space.

10Y US Treasuries underperformed with yields rising 6bps (-85bps) to 1,84%. 10Y Bunds climbed 7bps (-53bps) to -0,29%. 10Y Italian BTPs underperformed rising 12bps (-139bps) to 1,35%. US High Yield (HY) Average Spread over Treasuries dropped -10bps (-166bps) to 3,60%. US High Yield (HY) Caa Average Spread over Treasuries dropped -35bps (-45bps) to 9,44% with the accumulated underperformance of the past few weeks still striking and showing a lasting differentiation and distanciation of investors away from the worse credits.  US Investment Grade Average OAS dropped -4bps (-61bps, Z-score -2,5) to 1,11%. In European credit markets, EUR 5Y Senior Financial Spread dropped -1bp (-54bps) to 0,56%.

 

Gold dropped -0,3% (13,9%) while Silver shed -2,7% (7,0%, Z-score -2,9). Major Gold Mines (GDX) dropped -0,4% (27,9%). Bitcoin shed -3,1% (103,3%).

The right way to gauge the rationale for holding gold is as a hedge against inflation, a dollar reversal and occasional equity market corrections. In the current environment, we view gold as a good substitute to cash and bonds that could be held in unusually large proportions, coupled with equally large long equity markets exposure as the ongoing rally is an artificial liquidity pushed rally that will continue to erode the value of money (or their bond proxies) over time.  

 

Goldman Sachs Commodity Index is playing catch up for the year and rallied 3,3% on the week (11,5%). WTI Crude also rallied strongly by 7,3% (30,4%), supported by OPEC’s decision to further curtail supply late last week. CPER rallied 3,4% (4,8%, Z-score 3,1) as reflation trade ideas resurfaced. More evidence of growing cooperation between China and Russia crystallized last week with the inauguration of an 1,800-mile pipeline delivering Russian natural gas to China. The $55bn pipeline is a feat of infrastructure and political engineering. It is also Russia’s most significant energy project since the collapse of the Soviet Union. The Siberia pipeline is also a seal of physical bond strengthening between China and Russia.

 

Next week…

 

Next week will bring its dose of things to cheer or lament about…

German export and import data will be published on Monday (expected to decline by 0.3% MoM). The UK GDP and German ZEW survey come on Tuesday. The outcome of the Fed meeting comes on Wednesday along with the US CPI.

ECB President C. Lagarde will chair her first policy meeting on Thursday.

The UK elections will also be held on Thursday.

US November retail sales come on Friday (+0.4% MoM expected).

Towards the end of the week, D. Trump is also likely to take a decision to slap (or not) 15% additional tariffs on USD160bn Chinese imports.  

 

Trend Score Card

 

 

 

 

Click here for technical annotations.

 

 

US & International Equities

Check out US and International Stocks’ Technical Trend Status.

 

Sector Trend & Momentum (revised)

Check out equity sectors’ trend and performance …and when they break out!

 

Fixed Income

Check out 10Y US Treasury and Bund yields, their trend, expected Fed rate moves and speculative positioning in 10-year Treasury Futures.

 

US Recession Risk Radar

A comprehensive list of economic indicators to compare the current situation with previous recessions.

 

The Dollar

Check out where the Dollar stands Trendwise and Breakoutwise vs. G7 and EM counterparts.

 

Precious Metals

Check out where precious metals stand Trendwise and Breakoutwise. Get a sense of options (cumulative open interests on calls and puts) and futures traders’ sentiment (non-commercials open positions).

 

 

Why Trend Following Matters and How It Can Help You?

 

The last months of 2018 illustrated how fast and furious markets can fall. Trend following offers guidance as to when to join and when to leave an asset class with changing trend characteristics. A disciplined and rule-based trend following investment approach can serve as an effective portfolio insurance technique. Our purpose, beyond tracking economic, political and monetary developments is to assist readers investing in global markets with a keen focus on trend formation covering all important asset classes.  

 

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