Summary

• Modest gains for most risk markets last week
• Big rallies in Turkey and Mexico bond markets. Mexico inflation comes in better than expected
• Some weakness in lower-end of U.S. credit.  See our post on the corporate bond market.
• Euro periphery stable
• EM FX continues to strengthen as capital flows to the periphery
• China RMB strong shutting up the Panda Bears
• Sterling, our favorite global macro trade, up big
• Most EM equities up
• S&P shows surprising resilience after huge January bounce.  Shorts, including us, have taken big facials
• U.S. semis now showing leadership, and our bet, it leads the next leg to the 100-day moving average
• Financial conditions are easing markedly
• Lumber continues to rebound
• CRB now up 6.41 percent YTD.  Still waiting for Godot Deflation

Commentary:  Difficult S&P trading around political events.  The government shutdown is now yesterday’s story.  We have no doubt the POTUS threat to close down the govie again is paper tiger talk.  Move on.

China is coming to town and with Trump weakened and their awareness the administration can’t stand a 10 point drop in the S&P.  They will play hard.  The administration is going to have to cave on almost all big issues and settle for another Potemkin trade deal.  You never know with these guys, however.  If talks stall or tank, the market tanks, increasing the odds Trump caves.  The Chinese aren’t stupid and know their game theory.  Nonetheless,  the government shutdown is an example of how incompetent and destructive the administration negotiates. They are impulsive and divided, inflict huge pain on the country and get nothing at the end of the day. Watch this space.

Nevertheless, the market feels like it wants to go higher. Buoyed by the  Friday’s WSJ article the Fed is rethinking the balance sheet – big hat, no cattle, in our opinion – decent earnings and better sentiment on China’s economy, which is reflected in RMB appreciation.  We expect the S&P to take out the recent high at 2675.47 and then set its sight on 2710-2720, which is the zip code of a yuuuge Fibo level and the 100-day moving average.  Probably the place to sell but will revisit when we get there.   This, of course, assumes no rupture in China trade talks.

On the downside, the big, big, big number is last week’s low of 2612.86, which is now the 50-day moving average.

Huge week for earnings and China trade.

That’s our short-term view, folks, and, as always, we reserve the right to be wrong, which we often are.  All of us have no idea of the future and are driving in the fog.  We can only use our imprecise instruments to guide us.   Happy hunting next week.

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