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Stocks break higher, what’s with that? US dollar slips – McKenna Macro Markets Weekly

on March 16, 2019

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Key Takeaway

Despite the previous week’s bearish engulfing move US markets had a great week of gains. Better than that actually the week saw the Nasdaq and S&P 500 break out of the range highs and push sharply higher.

In many ways it was a curious move given the data was on the weaker side of the ledger which rates, bonds, and US dollar traders noticed and reacted to. Not so the equity market bulls who – fuelled by buybacks, hopes the Fed is on hold for a very long time, and no credible alternative investments chased return. That saw inflows into junk bonds and cash back into stocks.

It’s as if QEInfinity is back on the table – in the US and across the globe – as central banks wax dovish once more having noticed that their paradigm is upside down and growth harder to sustain than weakness in the global economy so investors are betting on lower rates and more stimulus.

That backdrop that supports that renewed stimulus would trouble stocks buyers and perhaps it will in time. But the market weighing machine is now a perpetual motion machine with FOMO and buybacks at least – if not more – important than fundamentals.

The week that was…

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

Key Themes driving markets

Stocks markets rally – the party where no one came….

Even with last Friday’s bounce of levels around 2,721 in the S&P 500 (I missed my TP by less than a point) when I sat down to write last week’s weekly the bearish engulfing candle that was the previous week’s candle suggested that the weakness hadn’t played out fully yet.

Indeed I wrote that even after the bounce that previous Friday, “we are still left with a bearish engulfing candle on the weeklies. Crucially – for my outlook on stocks – it also means the JimmyR trend indicator is still another week away from crossing bullish”.

Early in the week though it became clear that this outlook was wrong. My system triggered a long in the Nasdaq, I bailed on my shorts, and now we find that the S&P 500 has risen – in physical terms – to finish at 2,822 while the futures at 2,829 and around 107/8 points above the previous Friday’s lows.

That’s one heck of a rally given “real money” has largely sat this move out.

Source: FT.com

That the party was raging while nobody came is best exemplified by this chart above from the FT. of course we know that momentum traders have been following and driving prices higher since the lows and it seems clear that buybacks are also a big part of the rally so far.

Source: Twitter

This combination helps explain how – and why – the stock market can ignore the economic fundamentals. Because the rally has nothing to do with them.

But that begs the question when stocks are going to succumb to the inevitable gravity that a slowing US and global economy, weakened earnings outlook, and expectations of a swift trade war settlement which likely need to be unwound will happen.

It could be this next month many say as buybacks fade because of the earnings blackout period. That certainly seems reasonable. But here’s the question I ask myself. Could, fear of missing out, FOMO, replace buybacks. That is could money that is on the sidelines and the risk of underperformance drive cash back into stocks driving them higher until the air finally gets too thin?

The answer is YES.

Reuters reports, “Investors plowed $14.2 billion into global equity funds this week, the largest amount in a year as investors jumped on to 2019’s stock market rally, Bank of America Merrill Lynch said on Friday, citing flow data provider EPFR…U.S. equity funds were the biggest beneficiaries with net inflows of $25.5 billion while emerging markets saw net outflows…European funds also saw $4.6 billion of outflows after the European Central Bank slashed its growth forecasts and signaled a cautious economic outlook at its latest policy meeting”.

And that means that while rhetorically I can’t see any reason to buy stocks my daily system is now long again while the weekly system has been long for 9 weeks (that’s my trading not rhetorical self there).

Crucially, the JimmyR indicator has now switched to long again  can see by the arrows on the chart below.  I’ve talked about what this is a lot. But suffice to say it’s a good very MACRO indicator of overall direction. The funk in December has caused the Bolly bands to open up in a way that I haven’t seen for a very long time which is a warning that we may see more choppyness. But for the moment this stocks market rally may find more support than many think.

As discussed in the dailies, any moves into the 2,675/2,725 region is expected to be very well supported. I’ll update in the dailies as to whether we have a signal that such a move is a foot. Fo r the moment though, price is still pointing higher.

S&P 500 (futures based) Weekly – arrows = JimmyR 15 and 30 ema crosses

The EU’s data flow is now less bad than the data in the US – Implications for asset prices

It had to happen eventually (just because of the construction of the indexes), but the past week has seen the Citibank Economic Surprise Index (CESI) score for the United States fall below that of Europe, Emerging Markets, indeed almost everyone except China.

Now when I say it had to happen because of the construction of the indexes I mean that as data prints poorly so then are expectations re-calibrated such that the data eventually stops missing expectations. What had been remarkable was that EU data was so weak for so long.

That told us just how poorly the EU was performing economically. So it was no surprise to me or you dear readers that the ECB turned tail and is now trying to figure out how to restimulate growth and still claim it has done a back flip with a full twist.

Anyway the ECB did pivot, the Euro did fall and the USD rise, EU stocks have lagged the US for a bit, but now that the US data is worse than expected and the EU data is starting to be less bad what does it mean?

For the US dollar (in DXY terms and more broadly – right hand side of the chart below) the data flow looks to be a negative that could see the greenback lose a couple to a few percent from where it currently sits. In DXY and Euro terms that might see prices head toward the bottom and top of the respective ranges we’ve been trading in over the past few months.From a stock market portfolio the divergence between the S&P 500 and the data flow has been stark. While these charts are 12 week rate of change and thus the Stock component (LHS of the chart above) reflects the big bounce from the very week December period it is easy to see why real money has been leery of buying back into this US stocks market rally.

That’s the battle between our (my own) rhetorical or fundamental selves and our trading and signal based selves. For the moment the traders are winning.  

Looking at the Euro and USD directly we see they both have reversed off important levels over the past week.

In the USD Index terms that level is 97.70/90 which is both the multi-month range top and the 61.8% retracement of the big fall to the 2018 lows. It’s a solid level and the eventual break I expect will be decisive. But for now it’s a nut too hard to crack – and the data suggests it might remain so for a little while yet. That may put 95.00 perhaps even 93.70 into the frame first.

USD Index (DXY) Weekly – TradingView

For the Euro the level was 1.1185 which as the 61.8% retracement of the big rally into last years highs is analogous with the 97.70/90 region in the DXY. An eventual break below there – which I expect – will drive EURUSD toward 1.08/09 perhaps even 1.03/04.

For the moment though it too is a macadamia nut fresh from the tree.  That puts 1.14, perhaps even 1.1520/70 back in the frame. Either way it appears a period of consolidation/pullback is in the offing for the USD and thus for many pairs against the USD.

EURUSD Weekly – TradingView

Bonds don’t believe the hype…does that matter?

Looking at bonds then it is important to both note we should not ignore the signal they are sending about cross asset values but equally to recognise that – for now at least – the 10’s are still in the “Goldilocks zone” I have been talking about all year.

To reiterate what I have been saying in my daily spot positioning thoughts for many, many weeks now, “Bonds are in a 2.55%-2.82% range a break either side would be a very important signal for markets more broadly. Holding below 2.82% is a bullish sign for risk assets . But if 2.55% range low were to break that would be a bad signal for risk assets. Above 2.55% for the 10’s is kind of Goldilocksy. Watch this though. 10’s are telling us something right now.”

So, we’re not there yet. Not quite anyway.

US 10 year Treasury rate – TradingView

But again, it is clear in he flow into junk bonds over the past week or two, in the new money coming into stocks, in the bounce in oil, and the price action of the S&P 500 and junk ETF that bonds are telling a very different story.

And this is why a host of real money is on the sidelines. Bonds are likely to be right. But with the hope of more stimulus coming for stocks they may elevate first. But then….

10 year Treasury rate(black), JNK ETF (purple), S&P 500 (blue), and WTI (red) – TradingView

Theresa May – Monty Pythons Black Knight or a Machiavellian strategist?

Those of you who have been reading me for a while that I have been bashing the “Pommie Pollies’ for the ham-fisted way in which they have been handling the Brexit negotiations with the EU and then in the Commons itself.

You’ll also recall that last year when we saw Mrs May’s deal and everyone was up in arms I suggested that she may have just found the right mix that could pass because in pleasing no one really she’d struck the middle ground.

Much water has flowed under the bridge since then and the theta on my calls has steadily decayed. But, there is a growing school of thought that perhaps Mrs May just might have snookered her opponents – at home and in the EU – such that with the time constraint and bookends of a hard Brexit and the EU parliamentary elections she has finally focused attention on both sides of the Channel that a little compromise wouldn’t hurt.

Source: Twitter

To that end in the Bloomberg opinion piece referenced in the tweet above Mohamed El-Erian argues in a  that, “to many, this week’s handling of the Brexit saga by the British government has appeared chaotic and inconsistent, leading some to predict the demise of Prime Minister Theresa May’s leadership and the risk of the UK stumbling into a disorderly Brexit. That is certainly a possibility. Yet game theory suggests that, with external constraints starting to bind a lot more, the government could well end up using a strategy that allows it to outmaneuver its critics, both within and outside the UK”.

I must admit that I both agree with him and that equally I have been so focused on the ineptitude of the Pommie Pollies that this notion had receded to the back of my mind recently.

So it is something I have not been articulating but El-Erian is right when he says, “with many European officials likely to oppose UK participation in the elections, the prospects of a disorderly hard Brexit essentially imposing itself will prove very threatening to British politicians on both sides of the argument. In other words, a May-proposed deal that includes some further EU concessions will certainly still not be optimal for them but will be better than being widely blamed for the alternative. And Brussels would go ahead, also fearing the alternative”.

It’s an interesting take. GBPUSD is already better bid than it was a couple of week’s ago and this week got near the 50% retracement of the Brexit high/low at 1.3400. If it gets through there we’ll be talking about 1.37 maybe 1.40.

But to do that we need more than the UK parliament voting to take no-deal of the table. We actually need that to happen. Brussels will be crucial.

And just quickly,  the CFTC data

Not a lot of movement from  speculative community over the past week. But check out the 10 year short coming down. Look out for a short covering rally folks if 2.55% breaks. It could move materially, 2.28% would be my target on a break. That could fuel a big rally in stocks initially. At least until folks recognise what’s caused it.

The week ahead

Plenty of central bank meeting this week with the Fed on Wednesday and the SNB and bank of England Thursday the highlights. We also see some meetings in EM Asia as well.

Monday kicks off with Japanese trade data before EU trade stats are released later in the day. The Buba’s monthly report isn’t usually that exciting but what they say about the outlook might get some attention. Canadian portfolio flows and US NAHB index are also out.

Tuesday we get the Westpac consumer survey in NZ – my heart goes out to all my readers across the Tasman, what that bastard did Friday at prayers is unspeakable. But of course we must speak against it. In Australia we get a speech from RBA assistant governor Chris Kent on Bonds and benchmarks. Sounds a bit dry so shouldn’t move the markets. We do get the house price index and the minutes to this months RBA board meeting are out.

Swiss and French trade are out along with UK employment and unemployment data, the ZEW survey is out in Germany and the EU while in the US it’s factory orders and then the API data at the end of the day’s trade.

Wednesday’s fare is dominated by the Fed meeting, decision, statement, dot plot projections, and press conference. But before that we get Kiwi current account, the Westpac leading index for Australia, minutes from the BoJ meeting last week, and a speech from assistant governor Michele Bullock at the UDIA – given that forum she may touch on housing.

German PPI and UK inflation – RPI, CPI, PPI – is out as is the EIA crude inventory data.

Thursday is HUGE in the antipodes with Kiwi GDP and Australia’s employment data out. Unsurprisingly for employment the forecast is 15k and a 55 unemployment rate. But there are whispers of negative prints so watch out. The SNB is out with its decision as will the BoE a little later on. We also get UK retail sales, US jobless claims, and Philly Fed index.

Friday sees the release of Japanese inflation data and it is also Markit’s second biite of the marketing cherry with the release of the “preliminary” PMI’s in Japan, Europe, the US and across many jurisdictions. Good marketing, poor practice – why release partials like this a week before the actual numbers unless it’s just for marketing and to move the markets and get folks talking about you in the press.

Anyway, climbing down from the high horse, we also get Canadian retail sales and BoC inflation data. Existing home sales are out in the US along with wholesale inventories and CFTC data.

A big week, not as huge as the last, but plenty to chew on just the same. Enjoy.

A big week, not as huge as the last, but plenty to chew on just the same. Enjoy.

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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Greg MckennaStocks break higher, what’s with that? US dollar slips – McKenna Macro Markets Weekly