On stocks, rusted on bears, bonds, and forex – McKenna Macro Markets Weekly

on April 14, 2019

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Key Takeaway

JP Morgan (and Wells Fargo to a lesser extent) plus some M&A activity saw stocks end the week on a positive note and bonds get hosed as the hated risk rally continued and the S&P 500 closed above the 2,900 region for the first time since late September last year.

That US 10’s closed at 2.56% and the USD came under pressure fairly screams RISK AWN. The Greenback loses its exclusivity if folks are bidding a little harder for risk and thus upgrading expectations for emerging and other markets. And of course who needs the safe haven of fixed income Treasuries when all is good and she’ll be right mate?

Of course fundamentally the outlook doesn’t square with this risk positivity, UNLESS, unless you put some weight to the Fed and other central banks across the globes dovish pivot. TINA and FOMO folks – that’s a powerful combination.

Only a weak earnings season and poor guidance could change this. So the question for us all in the week’s ahead is whether the news is weak enough for the bears to be right.


The Week That Was…

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

Key Themes driving markets

Still, still, kinda, cautiously, bullish Stocks?

In a bull market be bullish. That’s just another way of saying don’t fight the trend.

But so many folks out there – traders, investors, punters, pundits – are convinced that this recovery from the 2018 lows is groundless, baseless, ridiculous, and can’t last. Of course they may be right. But when they claim it at some point in the future just remember they missed a very fast, vicious, and rewarding (in terms of return) move higher in US stocks and risk assets more broadly.

Because they became rusted on (see below, next section).

Now I am one of those who say perhaps that with global growth slowing this rally is overdone on fundamentals. I am one who strongly believes corporate actions and financial engineering in a world of ZIRP or near ZIRP policy – even US rates are close to zero on a historical basis – is a primary driver of this rally, and I am one who has said in my daily note “own puts”, “bring stops up”, “or take some profits”.

But I’ve also continued the bullish bias in this weekly note because well, heck, it’s a bull market and momentum has been pointing higher and i had the 2897 region as my target. naturally Friday’s close above 2900 now begs the same question I shared with you last week that Miss Du (I’m probably spelling that wrong as I don’t have her business card anymore) at China’s SAFE in Beijing always used to say to me. That is, “what now Mr McKenna”.

Again to answer that I’d refer you to the weekly chart of the S&P 500 below.

S&P 500 Cash Index – TradingView

The arrows are my JimmyR indicator – just the 15 and 30 ema crossover – which is long. The MACD is still rising and even though the stochastic is in overbought territory that in itself can persist for some time.

We are close to the record high in the mid 2940’s and if earnings season fails to dent the bulls enthusiasm for stocks we might be talking about new records above 3000. Support in weekly trend terms is 2786 then 2750/55 which is the 30 ema and the old trendline. Clearly a long way from here but levels that would need to give way to change the outlook.

Nearer to hand the dailies have support at 2766/72, 2837, and 2795/2805.

That all means there is some substantial room for pullbacks and the uptrend to hold and remain intact – before the signal of a reversal is given. Which is why I like puts right now. Vol is getting beaten down again and theta is theta, so an insurance against the BEARS being correct and the ability to ride this momentum for whatever it has left seems a decent play.

And remember the relative move charts I always use in the dailies and weeklies. Where the S&P goes so goes the developed markets stock indexes.

On not being a rusted on BEAR, or bull for that matter

I research and write to stay abreast of the moves in macro trends both from the top down and ground up. You can build the macro picture by knowing what is going on in the minutiae of cross markets and economies.

And, as regular readers know, when the fundamental macro outlook and the technicals line up that’s when things start to combine for some solid trends on which to catch a ride. Except for stocks and oil it’s not that kind of market right now. But plenty of folks have fought that and they have paid with undeperformance.

That’s what you see on the left hand side of the chart below – relative performance of funds who think they know more than the market. On the right hand side you see those same funds are getting shorter stocks as the data deteriorates.

What happens when you think you know more than the market – I know I know 🙂

It all makes sense fundamentally, economically, and with expected downgrades to earnings in the months ahead. But if the Fed is right, if JP Morgan and BoA CEO’s are right as well that the US economy is in a good place right now then stocks might not do as expected…like the Aussie dollar for the best part of six months.

Central banks have turned, they’ve signalled they will support the stocks market because – as flawed and financially repressive and disgusting as it is – they believe it also supports the economy. For now time hasn’t proved them wrong so the market is giving them and itself, the benefit of the doubt.

We should too, and be ready and have puts, to change out bias when the markets do too.

Bonds already hit our tactical target, what’s next?

That means I might be wrong on bonds before I’m right.

Last week I wrote “structurally though the 10’s are in a weekly downtrend – we could see 2.643%, maybe a little higher before a solid reversal. So it’s likely a market to ease into not go full wack upfront”.

Quite frankly I wish I’d have remembered I wrote that during the week when the daily price action as at Wednesday suggested to me maybe it was time to reverse lower again. That’s interesting in itself because a reader called me out for the cognitive dissonance she saw in my bond and economic views in the US.

I didn’t think she was right and argued it is a question of time frames. That’s still true because I believe inflation will remain low and as the US economy slows the Fed will ease to forestall same and thus bonds can rally. But there is a lack of consistency on the daikly and weekly time frames I write about between my stocks and bonds views.

I have written that bonds will get it right while also writing that we should ride the momentum higher in stocks. Different time frames and the messaging could have been better. Currently bonds are pointing higher and my system is short – lets see when the next turn is.

US 10 year Treasury Rate – TradingView

Watch commodities for a lead especially as oil may be topping

A risk rally wouldn’t be a risk rally if commodities didn’t join the fun. Indeed oil has been a big part of this risk rally having lead risk lower at the back end of 2018/ Likewise copper has joined in by catching a bid, though it is trapped in a range, and in many ways gold is the antithesis of risk – though not perfectly.

Copper (top left), Gold (top right) WTI (bottom left) and Brent (bottom right)

Anyway as you can see above, copper is in a range, gold looks on the brink of a break, and oil might be rolling over. All those positions are not necessarily consistent. But I’m watching oil closely.

That’s because while the trend higher is still very strong we may be seeing the start of a stall in the past week’s price action. That comes after it’s becoming clearer maybe the Russians are over the Saudis leading them around by the nose when it comes to cuts and pricing. Certainly that’s the feeling the Russians gave during the week. And it has been some time that various Russian oil executives have said they’d like done with the production cuts.

Watch $63.00 in WTI terms for a lead or hold. The flip side of that is gold at $1275/80. A break there could see the shiny stuff move below $1240. It needs to break $1330 at the minimum to change that outlook.

Keep and eye on them.

Trade War, Brexit, and Foreign Exchange

The trade war will come to some sort of resolution soon. It is unlikely to be the big bang everything is fixed and we are mates now sort of deal some may have hoped for. But it is likely to be some sort of deal both sides can live with.

I say that after US Treasury Secretary said during the week that both sides had worked on their enforcement mechanisms. That’s kind of the minutiae of getting a deal done and while there is still likely some big issues to discuss this is a clear indication the two sides are getting there.

Anyway, while the focus is on the China as the bad guy – and readers know I am the polar opposite of a China apologist – it seems some sort of deal is coming. And that may be important for the USD because my long held view is if a deal does get done then the USD may suffer a little because it will effectively be the US taking its foot off the throat of the Chinese and EM economies (Germany too perhaps) and as such the improved sentiment to these economies and their currencies could see the USD reverse.

USD Index (DXY) Weekly – TradingView

That fits the USD’s inability to break higher in DXY terms or lower in Euro terms recently. A test back toward the 95.50/96.00 trendline support  in DXY terms and 1.1380/1.1430 region in EURUSD terms looks possible.

EURUSD Weekly – TradingView

But this is a very low volatility market for currencies right now. Volatility has washed out of the daily and weekly moves perhaps because much is known about the relative economic and central bank outlooks after the past six months of data and recent almost universal central bank pivots. So we are all waiting for the next shoe to drop and wake forex out of its slumber.

No more was this lack of catalytic volatility more evident than in last week’s decision by the EU to grant Britain more grace to figure itself – and Brexit – out. Grace is not something in great supply in the UK parliament. But with non-deal Brexit seemingly as close to zero probability as possible you could be forgiven for thinking Sterling might rise.

GBPUSD Daily – TradingView

Yet it has not and is trapped in a range. That said though, above 1.2960 it does look like a topside break toward 1.3270/1.3300 looks likely. Below 1.2960 and we get 200 points off.

And just quickly,  the CFTC data

Euro shorts on the rise again while EURUSD finished the week above 1.1300 (just) for the first time in a month. Not frowning, waving? We’ll see. Yen shorts are higher and the slow capitulation of the GBP bears is almost complete. Aussie shorts might find life a little interesting too is 72 cents breaks, it has to break though doesn’t it.

Bond bears seem to have it right with where the 10’s ended the week – higher in rate – according with this uptick in shorts as at last week. Buyers will be wary it seems in bonds as well as the VIX given the increased in speculative net shorts.

It’s a bit of a one way bet, a bit of a melt up in risk appetite perhaps. Only a decent catalyst looks set to change that if the moves in forex positioning and the USD versus fundamentals are any guide to other markets – which I think they might be.

The week ahead

The week ahead slows down globally as we enter the back half of the month. But US earnings season kicks off properly and will garner much interest.

Monday is close to a waste land with just Swiss PPI, NYC Empire manufacturing, the BoC Business Outlook and then speeches by BoE’s Haskell and  Fed’s Evans out.

Tuesday morning Asia sees the  Fed’s Rosengren speak around 10am my time (1am London). Chinese house prices and the minutes to the recent RBA meeting are also out. UK employment as well as the German and EU ZEW surveys are out together with EU construction spending. We have a global Dairy auction for Kiwi traders to look at as well before industrial production in the US the NAHB housing market index and the API crude inventory data.

Wednesday is a biggish day for traders with the release of Kiwi CPI, Japanese trade and industrial production, and then China’s version of a quadruple treat in the release of retail sales, industrial production, and investment for march as well as Q1 GDP. In Europe we get Italian CPI, UK RPI, PPI, and CPI as well as EU CPI and trade balance.

Canada too releases both trade and CPI while the US drops the Beige Book, EIA crude inventories, and wholesale inventories.

Thursday is the big one in Australia with the release of the jobs and unemployment data. German PPI is also out and its IHS Markit “flash” PMI days for much of the globe. US retail sales are going to be huge as well as well as the Philly Fed, Business inventories, and jobless claims. Canada releases its retail sales.

Friday is Good Friday for much of the west though teh US releases housing starts data.


Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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Greg MckennaOn stocks, rusted on bears, bonds, and forex – McKenna Macro Markets Weekly