Still fighting the move higher? You might want to rethink that – McKenna Macro Markets Weekly

on November 3, 2019

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Key Takeaway

Last week’s suggestion that the increase in cross-asset correlations but not of gold meant it might be time to break out the champagne proved right with the S&P taking out the resistance line of what many saw as a megaphone top to end the week at 3066. Of course – and subscribers know this – the key was that the US economy again showed a level of resilience which underpins both the Fed’s constant assertion America’s economy is a “good place” and my own assertions the hand-wringers have been off the mark for more than a year now.

Who’d-a-thunk I’d see myself lining up with the Larry Kudlow view of the world but, as he reiterated again to Jonathan Farro on Bloomberg Friday, the Household Survey is still suggestive of further gains in US employment. He also suggested the 128,000 print in non-farm payrolls was actually more than 300,000 and a blow out when you add the 90,000 in revisions to the previous month and adjust for the GM strikes impact. I know, I know, he makes my version of Pangloss pale into transparency compared to his. But is he wrong?

The Fed doesn’t appear to think so, as Vice-Chair Richard Clarida made clear Friday, also on Bloomberg. If you haven’t had a chance to see the or hear the interview you should catch up with it – here’s a link to the page it’s on. Oh, and Kudlow, among others in the Administration, said Friday that the trade truce is playing out well and the likelihood of agriculture and finance being sorted out is high. So phase one is on track.

No wonder the S&P 500 finished at a record high! 

The Week that was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

Correlations still working toward a positive breakout

last week I highlighted that my cross-asset correlation work – specifically the absence of gold in terms of high correlations – suggest we were going to see a risk on, not the usual risk-off that we oftentimes see when things tend to correlate to +1 or -1 across assets. You can see that as at Friday cross-asset correlations are still very Christmassy but that gold (together with the Swissie and Crude oil) are still marching to the beat of their own drum on a day to day basis. 

The extent of green and red shows the correlations of =/- 0.75 and above

This is different to usual folks and I still hold the point I made last week that “on this occasion, my sense is that the path of least resistance (maximum pain) might actually bond rates, stocks, and risk appetite higher”.

Now bonds had an interesting week insofar as the 10’s in the US, Germany and beyond actually reversed sharply intra week with the US 10 – for example – ending ~7 points down on the week at 1.728%. Interestingly though that close Friday was actually ~12.5 points from the high of the week and a very solid rejection of downtrend resistance. We have to respect these kinds of levels – as the McKenna Mantra says – unless or until they break. 

US 10 year Treasury Yield Weekly – TradingView

With the S&P 500 US 10’s yield daily correlation around 0.81 at the moment, the chance has to be that if this lift in equity sentiment holds then bonds will certainly have another pop at the trendline and this time the chance of a break is elevated.

It’s worth highlighting that my view stocks would be lower started to change in late September and then in very early October I issued a piece to Paid Subs and then repeated it a day later to Indeed, earlier this month I published “A risk management approach to Markets right now” where I highlighted that the balance of risks given where the market psyche was at was to own stock calls and bond puts.

A big part of the story for me was and remains market positioning – the absolute flow of money from stocks into bonds and the risk that the US and China may indeed pull a rabbit out of the hat and put a trade deal together. The last part of that seems to be occurring, Brexit seems to be happening too, and the resiliency of the US economy is there for all to see – not to mention a NOT terrible earnings season.

So, as it stands I was dead wrong about the equity market a few months back and am glad I figured out I needed to hedge the cash I want to put into the market with stock calls. The S&P is up about 125 points since I first wrote that and while I’ve rolled the delta back and taken some money out of the market I’m still covered.

That’s particularly poignant when a market doyen like Peter L Brandt says maybe the S&P 500 is headed to 3524….3524 folks.

Source: Twitter

Now of course my positioning in the trading systems – not my pigheaded rhetorical self – is that the JimmyR has been long since March and around ~2750, the MACD daily has been long since October 10 (the same day I told paid Subs it was time to risk manage), and the weekly MACD got long a week later.

As at 11.32 am Sunday, November 3 Sydney time

So, PLB might be right, upward pressure might remain. Especially if money comes into the market and the push from both sides of the trade deal that things are moving in the right direction continues. That’s a point Kudlow made on Bloomy Friday that sets this apart from previous moves toward a deal…Chinese spokespeople seem to be on board. To wit, U.S., China reach consensus on principles after trade talks: Xinhua.  

Bonds, on the other hand, have been pretty much a wash with the US 10 year yield down a couple of points since I sent out my “risk management” piece. That’s interesting in itself and in some ways tells us that the expectation for global growth and inflation is still weak. That may change and bond rates may move higher again if stocks strength persists.

But it also tells us that there will be plenty fighting this rally in stocks. Maybe that’s what teh market needs, nothing like a wall of worry to keep the market bid.

To my charts then and while the JimmyR is pointing higher (weekly 15/30 cross as a trend indicator) it is also worth noting the 15-month ema has been supporting the S&P 500 price on its many dips since December 2018. Remember I believe markets are fractal and as such use exactly the same approach and system on all time frames, even down to the minute – which of course I don’t trade these days, nor hourlies either. So the level to watch as support in November is 2880 on a very long time frame. On the weeklies, it is 2972, while on the dailies at the moment it is 3017.

S&P 500 physical Weekly – TradingView

My own target, based on the weeklies is 3170/80. I know, I know, you think me stupid and I’m sure Mr Market will give me plenty of opportunities to feel so. But things look and feel like they are or have turned. So stay tuned – I’m staying hedged. 

Just quickly on currencies as the USD breaks down

The USD is close to a clean break lower and run to at least the bottom of the channel at ~96.50, maybe 95.85 and if that breaks then the outlook for foreign exchange markets across hte board is going to be very much changed as positions flips, long dollar positions are exited and short everything else (almost anyway) are chased to sqaure and maybe even longs entered.

USD Index (DXY) weekly – TradingView

You’ll know that this positioning piece has been something I’ve been banging on about for a little while now as USD longs persisted even in the face of the turn in many currencies against the Greenback. We are at levels that – to me at least – are very clearly close to triggering stops and exits.

You can see the positioning in the CFTC chart below.  

EURUSD weekly – TradingView

And you can see in the chart above that like the USD index above the Euro is through the 15 and 30 ema’s and resting on or about the 50 sma. A break through these levels – weekly basis – would signal a bit of a turn in the outlook more broadly. 97.22 is the DXY level while 1.1232 is the level to watch for the Euro. That’s a little bit higher than where the reasonably omnipotent 200 day moving average for the EURUSD sits at 1.1200. Euro has been above the 200-day ma for only 5 days of the past 18 months. So a break would be important, as would another reversal. And if a break of the 50-week sma happens then we might see some decent short covering to drive Euro higher – where I believe it (and many other pairs) will ultimately go against the US dollar.

Here’s the view of one of my favourite Elliot Wavicians (@TTCSteve on Twitter) on Euro. Up, down a bit, up quite a bit and then…look out BEEEEEELLLLLLLLLLOOOOOOOOOOOOOOW.  I tend to concur with that outlook, USD weakness for a bit and a move toward 1.14 initially…then we’ll see how things play out. 

Source: Steve’s Twitter page – pre-NFP

And I can see AUDUSD above 70 cents maybe a few cents higher, USDCNH, below 7 again, the CAD and Kiwi doing better. For a time at least. 

CFTC Data 

We saw some short currencies against the USD positions build a little in the Euro and Yen. But we’ve also seen CAD long positions swell, Aussie short positions cut, Pound too. So overall the USD long is falling. I expect that to continue. 

Source: CFTC, Refinitiv, McKenna Macro

Elsewhere it’s noteworthy the VIX positioning is still getting even more short, while gold is getting longer and US10’s shorts are growing again. That’s fairly bullish for risk appetite set of circumstances there. And remmber I’ve been saying for over a year now what’s good for the trade war – in terms of descalating – is bad for the USD. That’s what seems to be, or is at risk of, playing out. 

 The week ahead

Ugh, the worst time of year for a daily newsletter writer based in the Sydney Melbourne time zone is upon us. With the clocks change in the US this weekend the stocks close is 8am my time and forex doesn’t click over till 9am. Ugh, Ugh, Ugh….

Anyway, another big week beckons with Australian retail sales for September opening the batting along with ANZ job ads and monthly inflation for Oz. Japan is out and Europ has the release of its manufacturing PMI’s, before US ISM-new York and factory orders.

Tuesday is services PMI day and if these are half decent or not terrible and deteriorating we might be able to say that perhaps the worst is over for developed world growth at the moment. We kick off in Australia and then work around the globe. China will be important, Germany and the Euro Area too, then, of course, we get the US with both the Markit and ISM measures. Tuesday is also RBA day in Australia as well as Melbourne Cup Day. No change expected from Australia’s central bank. Euro PPI is out with US and Canadian trade along with the IBD/TIPP optimism index, JOLTS, and ISM non-manufacturing in the US. API weekly crude is out after the bell.

NZ unemployment kicks things off Wednesday and a little later on we get the BoJ’s minutes to the recent meeting…might be interesting to guage the shift toward dovishness. German factory orders are out in Europe then it is the European services PMI’s. In the US it is non-farm productivity, unit labour costs and EIA crude. Canada releases the Ivey PMI.

  Thursday is Australian trade and Construction PMI. RBNZ inflation expectations are out in NZ while it’s vehicle sales in Japan and industrial production in Germany before the BoE meeting and associated releases. Jobless claims are out in the US while the EC releases growth forecasts.

Finally, Friday is Japanese household spending, RBA quarterly SOMP and home loans data in Oz. German and French trade is out as is China’s trade data. Canada releases its trade data and we get Chinese inflation apparently…which seems weird. I’ll double-check this week. 

Have a great week.


Greg McKenna
@gregorymckenna on Twitter

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Greg MckennaStill fighting the move higher? You might want to rethink that – McKenna Macro Markets Weekly