Sunday, January 20, 2019
Please find below our latest Weekly Trend Update providing some high-level indication of the trend status for major asset classes.
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Have a nice evening.
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)
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