Global Macro Monitor

Global Stock Indices

Global stock markets performed well in the Q3, especially the emerging markets.  Capital is flying into the sector.  Argentina looked unstoppable up almost 20 percent in the quarter with another 4 percent increase last week, and now up over 50 percent on the year.   Guess this is the time to start selling at least for trade to reload lower.

Greece down on profit taking and IMF noise.

Global 10-year Bond Yields

Yield chasers continued to commit capital to the high-yielding emerging markets such as Brazil and Indonesia.  Portugal came in big on recapturing of its investment grade rating.

Global bond yields on the rise in the past few weeks.  We are expecting a taper tantrum in Europe and a significant rise in European yields this month.   That trade is dependent on how the situation in Spain unfolds.

Global Currencies

The Argentina peso was the weakest currency for the quarter and, in part, explains the country’s big equity gains.  China showed strength but was weaker for the month of September.  The dollar index was down almost 3 percent but looks like it has put in a bottom and has been stronger the past few weeks.   Catalonia should give the dollar a further boost.

Select Commodities

Zinc up big in Q3 and after a few weeks of selling ended the month strong. Crude trading better based on the perception than demand is growing and the OPEC and U.S shale obsession seems to have waned for the moment. Grains continue to trade poorly.

Other Risk Indicators

U.S. semiconductors rocked the free world in the Q3 along with the rest of the tech sector.  The Stress Index came off the lows but remains below zero, which constitutes normal financial conditions. A negative number connotes very favorable financial conditions. The index has been declining (favorable) over the past few weeks, however.

On The Radar

We are expecting a sharp trap door sell-off in the risk markets in October triggered by a myriad of potential events, including a bond market temper tantrum in Europe,  a China economic or political shock coming out of the 19^th Party Congress beginning on the 18^th,  severely overbought markets, geopolitical shocks, and others.

We are watching the fallout from the Catalonia vote, politics in China, progress on the Trump tax reform deal,  the continued sell-off in global bond markets.   Looking for emerging markets to cool off, which are way overbought.

Key Charts

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In our Sunday night post,  Merkel Retains Power, Far Right Moves To Bundestag, we asked:

Will the Greens demand the current German Finance Minister, Wolfgang Schäuble, step down? — Global Macro Monitor, September 24

This morning the headline on Politco.eu reads,

‘It’s over’: end of the Schäuble era – Poltico.eu

Not getting much buzz in the U.S. but this is  big news.

Sound likes Merkel is trying to woo the Free Democratic Party (FDP) into a coalition government and dangling the Finance Ministry as the carrot.  We hear the FDP wants the Finance portfolio.

If the liberals [FDP] succeed in taking over the finance ministry, they’re unlikely to abandon Schäuble’s parsimony. Like Schäuble, FDP leaders are champions of budget discipline and take a skeptical view of plans put forth by French President Emmanuel Macron, such as a substantial eurozone budget. – Politico.eu

Recall Germany’s concerns that a euro area fiscal union morphing into a transfer union.

How could Germany, with a budget surplus last year of 0.8 percent of GDP and the public debt of 68.3 percent of GDP, accept a fiscal union with Spain running the euro area’s largest budget deficit of 4.5 percent of GDP and a public debt of 100 percent of GDP?  – CNBC, May 14

If the Green Party gets the Finance Ministry it will be good news for Greece, the rest of Southern Europe and the anti-austerians.

Merkel has asked Schäuble, 75, to become speaker of the parliament, which is sure to become much rowdier with the arrival of the Alternative für Deutschland (AfD), the first far-right party represented in Bundestag.  The AfD won 94 seats in the house by securing 12.6 percent of the vote on Sunday.

Markets

The euro has been hammered since the election and it looks like the European bond market temper tantrum is underway, as we suspected.

The soon to come European bond market temper tantrum is the external shock we expect to ignite a decent sell-off in global risk markets in October.   There are other events, such as an economic or policy shock coming out of China’s 19th National Congress of the Communist Party, that can also rock the markets.

Don’t discount a potential big macro swan coming out of Washington either.

We are not looking for a bear market, but a decent size flash-type crash that may last a few days or a few weeks, which can be bought.   Everyone is waiting to pounce — until volatility spikes and fear takes over.   It should be fast and furious, especially with the rise of the buy the dipper algos and trading ‘bots.
 – Global Macro Monitor, September 20

Euro sovereign weakness spilling into an already weak U.S. bond market, adding to the hawkish Feds speak, we believe will lead to a decent sell-off in risk assets sometime soon.  The 10-year U.S. yield is up almost 30 bps since September 7th.

Another 10 bps higher in the 10-year Bund yield will break resistence and  the European bond sell-off  could gather some momo.   Watch this space.

U.S. Tax Reform

U.S. stocks getting all lathered up over tax reform especially small caps as tax cuts affect small caps disproportionately positive.   “Harder than health care” is the word on the street in Washington about passing a tax reform bill.   The lobbyists bring out the big weapons and money during tax reform.  Budget hawks want offsets, which will take away the goodies from many special interests.

The Republicans are in their hurry-up offense as they smell a wave election coming in 2018 and they will soon be out of power.

It is starting to get interesting.

Mr. October on deck.   Stay tuned.