Sunday,
January 20, 2019
Dear Reader,
Please find below our
latest Weekly Trend Update providing
some high-level indication of the trend status for major asset classes.
For your convenience, we
have added further explanation on how to read the trend status report.
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Have a nice evening.
Marc
Trend Status Update:
The S&P500 rallied +2.9% (+6.5% ytd) last week delivering a broad rally which took every
single equity segment (US, Europe and Emerging markets) out of negative trend
(except for India) but for the most part not yet in positive trend (US indices
are still between 3% and 7% below their 200dma). However, most US indices broke
their 50dma on Thursday, then powered ahead on Friday, fuelled by a trial
balloon suggesting that the US administration is considering backpedalling on
some tariffs imposed against China. This caught participants in a spiral of
short and hedge covering. What characterizes bear markets is often the violence
of their short covering rally and with this recovery, we retraced 50% of the US
markets selloff. Goldman Sachs most shorted index jumped +13.6% so far this
year, double the S&P performance which gives credence to the short covering
rally thesis. Over the week end, D. Trump’s TV address fell on deaf ears with
no end in sight just yet to the government shutdown. Trump expressed optimism
over ‘very extraordinary’ progress made in trade negotiations with China but
discarded Friday’s WSJ allegations of a backpedalling on trade sanctions as
being premature. Next to the Fed’s renewed flexibility, there was not much data
to be worried about last week. Should US December economic data come out weak
in the coming days, they will be discarded as “old news” because of the ongoing
recovery in risk assets. Should January data come out weak, they will be
discarded as “temporary” because of the impact of the US government shutdown.
Perhaps it was also this absence of bad news and the idea that no news is good
news that fuelled part of this relief rally. Who knows how the rest of the year
will unfold? US markets will be closed tomorrow and Davos starts on Tuesday.
The Dollar
index gained last week, taking it out of “bear trend” back into neutral
zone.
The EM
currency index went nowhere and stayed above its 50d and 200d ma confirming
the positive trend that prevailed since the beginning of the year on EM
currencies.
Credit markets (HY) rallied following equity markets higher and are actually very near
breaking the 200dma which would set them back in bull trend... We are taking
this rally with a pinch (or two) of salt. More than for equities this was a
short covering of outsized short (with an outsized cost of carry i.e. the yield
plus the cost for borrowing the share) bets that were placed in December. That
being said, there is a very large built up in the put open interest suggesting
that investors remain defiant of this asset class despite rallying prices in a
context of excessive debt (see article
on IIF report issued last week) and an expected deterioration in the credit cycle as the economy slows
down.
There is little long-term value left in holding
core government bonds, either in Europe, or in Japan, or to a large extent in
the US but the trend in rates is not clear. We still prefer mixing cash with
local or USD currency debt in EM markets for the fixed income segment. Last
week’s Italian 10y bond auction sold like pancakes.
Gold shed -0.8% in the panic bid for stocks on Friday but remains in bull
trend for another 2.5% while silver’s similar status is threatened by the metal
sitting right on its 200dma. We like silver at this juncture based on valuation
as commodities are giving early signs of bottoming out.
As regards commodities
more broadly, it will be a while before DBC rallies over its 200dma (9%) but it
trades above its 50dma with a high z score which suggests a reversal potential
away from (negative) trend.
Trend Score Card
US & International Equities
Govt Bonds & Credit (IG and Junk)
The
Dollar
Precious Metals
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