This most hated risk rally continues as President Trump calls for QE – McKenna Macro Markets Weekly

on April 7, 2019

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Key Takeaway

The most hated stock market rally continues still. The bears are raging and fighting it, but prices keep rising. Oil prices too is on the March again after a mid week stall. Positive risk appetite, less worries about the global economy – for now – and the Saudi squeeze are tightening the market.

Bonds have had a wild time but currency markets are waiting for the next shoe to drop.

Oh and of course President Trump has gone all uber-dove calling for and end to QT and another round of QE. Madonna!!!

The week that was…

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

Key Themes driving markets

President Trump keeps the pressure on the Fed?

Quantitative easing folks. That’s what President Trump said Friday the Fed should be doing. It’s just another escalation in his battle with the institution he blames for taking the cream off the top of his fiscally induced surge in the economy and markets last year.

Couple with his thoughts to nominate both Stephen Moore and Herman Cain to the Fed Board and we have clear pressure on the central bank not to hike rates regardless of how the economy turns out – especially if the current incumbent Fed is right and the outcome is less dire than the recessionistas suppose.

This battle at the Fed is a good indication of the possibility to be structurally worried about the outcome but tactically positive about such a move – for risk assets anyway. I thought Guy Lebas, Janney Capital Management’s chief fixed income strategist, put it perfectly during the week on Twitter.

SPOT ON FOLKS !!!! – Source: Twitter

Of course Lebas also noted Friday that while the headline number for non-farms of 196,000 was a good headline the underlying data was less positive and very late cycle. So even though unemployment is at 3.8% folks are still worried about the outlook for jobs.

The key here though is the pressure is on the Fed to do nothing for a long time if it really believes the economy is in the “good place” NY Fed President John Williams said it is recently. That BofA CEO Brian Moynihan used the same phrase last week to describe the economy means Williams might be right.

The point is the Fed won’t do anything to upset the apple cart right now and is more likely to cut than raise rates on a 12 month horizon. But that’s a good thing for risk folks – as any of you who have sat through the almost 30 years of Australia’s economic expansion without a recession a long pause to evaluate the economy and then either  a cut, or a hike, is a big part of avoid the very recession everyone fears.

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

Which brings me first to bonds and then stocks and the US dollar below.

Having noted the opportunity for a tactical short in US 10’s to run to 2.49/51 and the previous breakdown region of 2.55% last week it was interesting that we saw  a test of and reversal off 2.55% already in the last week.

But such is the increased volatility of bonds right now that this is not entirely unexpected. And for mine that test of 2.55% is a structural buying opportunity even though the dailies do suggest we might see further bond rate weakness – higher levels.

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. Or of course we can wait for the daily indicators of my system to turn – I update in each mornings newsletter during the week.

US 10 Year Treasury Rate Weekly – TradingView

Still bullish Stocks?

Last week I also highlighted that I favoured the topside for stocks and noted – using the S&P 500 as a global bellwether – that it was , “looking like a retest of the 2,866/77 (resistance zone and Fibo level) are on the cards. Above that it is the 138.2% projection at 2,897. Support is 2,785/90 then 2,760”.

Friday’s futures high was 2,897.5 – so mission accomplished. But, as Miss DU a China’s SAFE in in Beijing used to say to me “what now Mr McKenna”. To answer that I’d refer you to the weekly chart of the S&P 500 below.

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.

S&P 500 (ES futures) Weekly – TradingView

So the weekly points higher toward the record highs as does the daily chart. And as comfortably this is for my rhetorical self because of the vertical nature of the moves this is how things are setting up still.

Russell 2000 ETF Daily – TradingView

That means it’s a buy the dip rather than sell the rally market right now with 2,840 and 2,810 critical support for longs. And if stocks in the US retain a bid – and the Russell has just broken out too, then global markets will likely retain their bid.

At least until we see the data start to dip once more and the narrative turn back to global growth concerns rather than that we’ve passed peak pessimism as I noted last week.

Here’s the S&P versus the FTSE 100, DAX, and Nikkei Monthly.

THE BELLWETHER – S&P 500 v FTSE, DAX, and Nikkei (TradingView)

The USD remains bid…

Despite the pretty awful recent data flow in the US which has seen its Citibank Economic Surprise Index falling to the lowest level since 2017 over the past week the US dollar has retained a mild bid tone.

The USD is still not super strong by any stretch of the imagination, but certainly better than many of the naysayers have been suggesting. Yet, that said the Euro still managed to hold above recent lows and the DXY is yet to best the 97.70/97.90 range top and Fibo resistance that is needed to kick it to 100+, 103/104.

USD Index (DXY) Weekly – TradingView

But, as you can see in the chart above, besides this significant resistance level in the 97.70/98.00 the overall outlook chart wise – weeklies – is for a continuation of the USD rally.

An ultimate break to the topside seems only a matter of time. But, as I always say and write I respect lines and levels – unless or until they break. Above 97.70/98.00 is the multi-touch red trend line you can see in the charts which dates back to the DXY’s April 2016 low and comes in at 98.55/65.

One of the interesting things though about this USD move, and the Euro and Aussie as well, is that the sellers are getting diminishing returns for the selling they have been doing – see CFTC section below.

Indeed the orange lines – spec positioning – shows there are still available position limits to sell more of both currency and thus buy USD. But that also we are getting closer to those extreme levels and it’s not seeing the historical follow through oin the price of AUDUSD or EURUSD right now.

Which, realistically with the levels of resistance in USD and support in Euro is – in a short term trading sense – about the only reasons not to be uber-bullish the USD.

Just look at EURUSD, it fairly screams collapse. It just needs to break below the 1.1165/85 support zone. But Friday saw industrial production in Germany print a little better than expected which rescued Euro from the lows and let it finish the week above 1.12.

EURUSD Weekly – TradingView

But and here’s the thing, I do wonder if the looming trade truce – Kudlow confirmed talks are continuing next week via video conference – is a USD negative. My hypothesis being that a truce will be viewed as the US lifting its foot off the throat of China and thus the global economy and as such economic growth relativities will move back in favour of China, EM, and other currencies as well.

But we need to see a deal first, its outline, and judge its efficacy before that happens. Till then the USD is bid, but I’m leery of the big levels noted and the inability of the Greenback to make substantial headway against the CAD,SGD, CNH/Y, or the Aussie dollar.

It really is a time to watch levels and react to either holding or breaking.

And just quickly,  the CFTC data

The table speaks for itself. The market is getting longer of net USD exposure across the board while getting longer of WTI and short US 10 year Treasuries.

The positions are getting extreme. But that is not a reason in itself for a reversal. We need a catalyst for that. I’ll update during the daily newsletter should that catalyst appear.

EDITORIAL – Don’t get caught hating everything. Are we here to make money or are we here to be right?

This editorial is dedicated to a very shouty twitter right now and hopes to suggest that getting caught in vitriol (actually love OR hate) is bad for your returns. Being flexible and matching time frames is as important as it ever has been right now.

To wit, I’m a very fluid strategist and trader, I’m kind of fluid in many aspects of my life actually. I am not nostalgic, not sentimental, don’t hold on to the things or the past, and my kids listen to more music from the era when I was growing up than I do.

So maybe I’m hardwired in a manner consistent with being able to abstract my rhetorical and judgemental beliefs from what I see when I’m trading and strategising about markets and economies.

Or maybe the fact that when I started trading all those years ago I played futures aggressively so that when I’ve managed portfolios I’ve always had this “momentum guy” thing about me. Short term I go where the river runs, the path of least resistance as Bill Williams wrote 20 years ago – or at least I try to. Medium and longer term are more macro and strategic.

The economy is not the stock market…Citi Eco Surprise versus the S&P 500

Why does this matter?

Because there are so many Trump haters, so many folks who are sure this market is going down because the economy is slowing sorry already in recession, so many who think what President Trump is doing to the Fed will end in tears, so many who are worried about the US debt position, and so many who still think the USD is dead and losing its appeal.

So many who treat everything through THEIR PRISM and fail to take account of other factors

What we end up with is so many hand wringers and shouters who are in turn so vocal on Twitter it is almost impossible to avoid them. Yet stocks keep rising, the US dollar retains a bid, bonds are still relatively well bid themselves and the shrill voices of Twitter grow louder.

Of course, partly this is how one markets oneself on Twitter and in the press, and partly it is genuine blindness to the opportunities in front of them as these folks search to be right and say – at some point in the future – “see, I told you so”. Exclamation mark, Exclamation mark.

And they may be right – but being early can be the same as being wrong. particularly if you hold a rusted on rhetorical view which hamstrings your trading before the event crystallises

So in light of President Trump’s latest Fed comments, the clear attempts to goose the market with trade talk, my editorial repeats what I said in the daily earlier this week :

“I am not defending President Trump. To me he is an infantile bully. But we aren’t going to make any money if we let our love, hate, disdain, admiration, whatever the emotion cloud our judgement about what is going on here”.

That’s as true of  one’s approach to President Trump, the trade talks, the economy, central banks, as it is of the market reaction to  all these stimuli.

Trump is the leader you get in the fourth turning, if you want to put it that way, and of course there will be a reckoning and reversal at some point. But central banks – not just in the US but around the world – have signalled in the past few months they are not ready for that reckoning. Markets, traders and investors, have reacted to that.

So, what’s that old adage? Trade the market in front of you.

We’ll get a chance to act on a many of the views I agree with but aren’t serving traders well at the moment at some point in the future – maybe very soon. Indeed rhetorically I’m struggling with this risk reversal as much as anyone else. When it comes to the turn I will try to catch it as soon as possible.

Oh, and there is this:

Source: Twitter

Peter is right, and you’ll – we’ll – all be much happier. BTW this is my own personal guide – The Desiderata, and has been since I was a kid.

The week ahead

The week kicks off Monday with Japanese trade, consumer confidence and the eco watchers survey. In Australia we get ANZ job ads for March which will be more important than usual given teh RBA’s entreaty that the jobs market in Australia is strong. German trade is out in Europe and then in Canada we get housing starts and building permits. In the USA it is factory orders for Feb which are released.

Tuesday’s home loan data in Australia will garner the lots of interest given falling house prices and the correlation with debt demand. Italian retail sales are out as is the NFIB survey in the USA. JOLTS and the IBD/TIPP business survey are also out as are the API crude data late in the Day in the US and very early Australia and Asia Wednesday.

Wednesday  kicks off with Fed vice chair Clarida giving a speech at 8.45am my time which is 6.45pm NYC. We also get South Korean unemployment Japanese PPI and machine orders plus a speech from BoJ governor Kuroda. In Australia Westpac consumer sentiment is out – that’s important, but so too is the unemployment expectations sub-index of that number. We also hear from RBA deputy governor Guy Debelle.

In the UK we get Feb GDP, manufacturing and industrial production and trade. But the highlight for the day will be Mario Draghi and his colleagues at the ECB’s decision, statement, and then Press conference. In the US it is CPI inflation, a speech from the Fed’s Chair Jerome Powell and governor Randy Quarles, and the last FOMC minutes at 2pm Washington which is 4am my time.   Of course EIA crude and other inventories will be out as well. AND, EU leaders will hold a meeting April 10  to discuss Brexit option – 2 days before the new deadline. Watch the French folks.

Thursday the focus shifts to Asia with CPI, M2 and new loans released. We also get NZ food prices, Japanese money supply and foreign bond purchases and another speech from RBA deputy governor Debelle.  German and French inflation is also out while in the US we get PPI, jobless claims and then 5 Fed speeches from Powell, Clarida, Williams, Bullard, and Bowman. Friday’s newsletter will write itself 🙂 The Indian elections kick off Thursday as well.

To round out the week Friday we get Korean exports and China trade both very important leads for risk assets and global growth. The RBA releases its financial stability review, Germany issues a wholesale price report, the UE has industrial production out and in the US it is export and import prices.  And, earnings season kicks off in the US with JP Morgan and Wells Fargo releasing their results.

A decent week of catalysts – Enjoy.

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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Greg MckennaThis most hated risk rally continues as President Trump calls for QE – McKenna Macro Markets Weekly