Shanghai Breakout

Posted on September 1, 2017 by macromon

Man, emerging market equities are in total beast mode.

The emerging markets index MSCI Ishares ETF (EEM) is up almost 30 percent on the year.  Turkey and Argentian up almost 40 percent.  India,  Brazil, and Korea almost 20 percent.

Emerging currencies also showing strength. The dollar is weaker over 5 per cent against Mexico, Thailand, Korea, Russia, Chile, China, and South Africa.

We will have more posts on EMs next week.

Shanghai

China’s Shanghai Composite is also showing signs of life and follow through after breaking out of a year-long trading range last week. In our Week In Review post from Sunday we stated:

Watching the Shanghai for follow through. – GMM, August 27

Though not very compelling, it did.

Blow-off Before Correction?

Global equities seem to be in entering the giddy stage.  We wouldn’t be chasing up here and it does kind of feel like we may be moving into a September blow off before the correction we’re expecting in October.    Or not.

 

Shanghai_Sep1

 

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President’s Rebuttal Tweet On Gen. Kelly Conflict

Posted on September 1, 2017 by macromon

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Get Shorty If The “Church Lady” Bolts La Casa Blanca

Posted on September 1, 2017 by macromon

A stunning piece in the Washington Post posted last night about a potential conflict between President Trump and his Chief of Staff,  General John Kelly,  now dubbed the “Church Lady” by the White House staff.

Political risk in Washington has diminished with respect to the budget ceiling as the pols unify over the Hurricane Harvey tragedy.  The information in the article partially negates that positive,  however.

Money quotes from Washington Post piece:

  • Trump appears to pine for the days when the Oval Office was a bustling hub of visitors and gossip, over which he presided as impresario… [now] confidants privately fret about his suddenly dark moods. 
  • And some of Trump’s friends fear that the short-tempered president is on an inevitable collision course with White House Chief of Staff John F. Kelly.
  • Trump chafes at some of the retired Marine Corps general’s moves to restrict access to him since he took the job almost a month ago, said several people close to the president. They run counter to Trump’s love of spontaneity and brashness, prompting some Trump loyalists to derisively dub Kelly “the church lady” because they consider him strict and morally superior.
  • “He doesn’t like how Kelly’s handling him. He’s turning on people that are very close to him.”
  • Meanwhile, people close to the president said he is simmering with displeasure over what he considers personal disloyalty from National Economic Council Director Gary Cohn, who criticized Trump’s responses to a deadly white supremacist rally in Charlottesville on Aug. 12. He also has grown increasingly frustrated with Secretary of State Rex Tillerson, who has clashed with the president on issues including Afghanistan troop levels, the blockade on Qatar and Cuba policy.
  • This portrait of Trump as he enters what could be his most consequential month in office is based on interviews with 15 senior White House officials, outside advisers and friends of the president, many of whom spoke on the condition of anonymity to be candid.
  • [Roger] Stone added, “General Kelly is trying to treat the president like a mushroom. Keeping him in the dark and feeding him s— is not going to work. Donald Trump is a free spirit.”
  • The president has been quietly fuming about Cohn for the past week but has resisted dismissing him in part because he has been the face, along with Treasury Secretary Steven Mnuchin, of the administration’s tax-cut strategy.
    – Washington Post, August 31

Upshot?

1)  Gary Cohn revealed resignation risk has gone up with the new information from the article as the President may now think twice about appointing Cohn to the Federal Reserve Chair;

2)  The potential collision course with General Kelly is downright chilling and will spook markets big time if it happens;

3) There are still lots of leakers in the White House as the article reveals;

4) The knives are out in the White House for General Kelly.   Not good.

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QOTD: The Maverick

Posted on September 1, 2017 by macromon

Americans recoiled from the repugnant spectacle of white supremacists marching in Charlottesville to promote their un-American “blood and soil” ideology. There is nothing in their hate-driven racism that can match the strength of a nation conceived in liberty and comprising 323 million souls of different origins and opinions who are equal under the law.

Most of us share Heather Heyer’s values, not the depravity of the man who took her life. We are the country that led the free world to victory over fascism and dispatched communism to the ash heap of history. We are the superpower that organized not an empire, but an international order of free, independent nations that has liberated more people from poverty and tyranny than anyone thought possible in the age of colonies and autocracies.

Our shared values define us more than our differences. And acknowledging those shared values can see us through our challenges today if we have the wisdom to trust in them again. – Sen. John McCain, WashPost – August 31

(QOTD = Quote of the Day)

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Super Mario’s Problem In One Picture

Posted on August 31, 2017 by macromon

File under “Kafkaesque Markets.”

Super Mario's Problem_Aug 31

Source:  MacroTourist

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Month in Review – August

Posted on August 31, 2017 by macromon

Global Stock Indices

All emerging markets.   Argentina up on good politics.   China breaking out through strong resistance.  Europe down on strong euro.  India stalls at resistance as RBI warns of a potential stock market bubble.  We are buyers for the long term in Indian stocks on weakness.

The Reserve Bank of India said that there are evidences of a bubble building up in Indian stock prices based on an econometric model, but there is no bubble yet since the current stock rally is driven by strong fundamentals, it said in its Annual Report. – Economic Times, August 31

 

Monthly_Stocks

Global Bond Indices

Surprising rally in bonds almost across the world.   Global economic recovery picking up and industrial metals rocking.  The Great Distortion of the global markets continue anchored in the belief real rates and inflation can stay low forever.  U.S. yield curve 15 bps flatter.  Waiting for quantitative tightening to begin in the U.S. in September.

Credit spreads widen a bit with the pick up in stock volatility.

 

Monthly_Bonds

Global Currencies

The dollar index tested and broke for a few minutes the 92 level.  Bear trap?   As we said during the week,   Draghi is going to have trouble swallowing a 1.20 euro/$.   On cue,  the ECB came out dovish last night to talk down the currency.

“The exchange rate has become a bigger issue,” one of the sources told Reuters. “It is now less favorable for an exit and a stronger argument for a muddle-through option.” – Reuters

EM currencies strong.

Look at China.  That is a big move, probably due to restrictions on capital outflows and tight monetary conditions,  in part, a bit of politics to assuage the Trump administration, but mainly an effort to limit and reverse capital flight.

Monthly_Currency

Selected Commodities

Industrial metals rocking with better China and strengthening global recovery.   Crude oil could not hold $50 and now getting hit on refinery shut ins due to Hurricane Harvey.   Corn and wheat under  pressure since the U.S. Department of Agriculture forecast a larger-than-expected domestic harvest on Aug. 10.

 

Monthly_Commodities

Other Risk Indicators

Biotech finished month strong on the back of Gilead’s move into CAR-T treatment with the acquisition of Kite Pharma.   Retailgeddon continues as Amazon marches on, though some recovery at month end.    Energy can’t get off the mat and the commoidty remians range bound.

 

Monthly_Other

What Is On Our Radar

We expect risk to remain in beast mode, with a pick up in volatility,  through most of September until the Fed announces quantitative tightening (QT), which is a game changer, even though it is not new news.  Still looking for a nice sell off in October, but no bear market until higher policy rates and double-digit percent shrinkages in Fed and ECB balance sheets.  ECB and strengthening euro a wild card.

Key Charts

Yield Curve_Aug31.png

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Shibor_Aug31

 

 

 

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Immigration: 27% of U.S. Doctors Foreign Born

Posted on August 30, 2017 by macromon

The shortage of GPs [doctors] in England has been caused by multiple factors, including doctors leaving the profession early because of an increasing workload linked to a rising population. The shortage predates Britain’s vote last year to leave the EU, but the Royal College of GPs said before the June general election that Brexit might exacerbate the shortfall.

…“There is an inherent conflict between the need to hire international staff in order to maintain public services and the Brexit-related agenda of reducing immigration,” he added.  — FT

And in the U.S.,

A new report by the Association of American Medical Colleges (AAMC) predicts that a shortage of physicians in the U.S. is going to grow worse.

The report estimates a shortfall ranging from 34,600 to 88,000 doctors by 2025, compared to what our growing and aging population may need. By 2030, the shortfall is expected to total anywhere from 40,800 to 104,900 doctors. – CBS

And this,

Healthcare is a critical part of the U.S. economy, providing jobs for millions of Americans and trillions of dollars in expenditures. However, growing health needs of baby boomers, coupled with acute shortages of health workers, are straining the sector. Unfortunately, labor force issues will be exacerbated in the coming years as retiring baby boomers strain the system and up to one-third of physicians retire because they fall into that same age category.

Currently, more than one-quarter of physicians and surgeons in the United States are foreign-born. In addition to physicians, roughly one-fifth of nurses and home health and psychiatric aides, and more than one-sixth of dentists, pharmacists and clinical technicians in the United States were foreign born in 2010. When foreign-born professionals account for 16% of all civilians employed in healthcare occupations and one-fourth of practicing physicians, the system really does depend on a functioning immigration system. There are simply not enough native-born healthcare workers to meet the growing demand–especially in the geographic areas with the greatest need. – Forbes

Stat of the Day_Aug30

 

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Nominal GDP At 4 Percent, Fed Way Behind Curve

Posted on August 30, 2017 by macromon

The BEA revised Q2 GDP up this morning,

Current-dollar GDP increased 4.0 percent, or $189.0 billion, in the second quarter to a level of $19,246.7  billion. In the first quarter, current-dollar GDP increased 3.3 percent, or $152.2 billion.  –  BEA

This makes us think the Fed is waaaay behind the curve.   Markets are much too complacent about the potential for  inflation to heat up and as we suspect, no, strongly suspect there may be some measurement problems with the data.  Just as some suspect the same with the GDP data and now look to the labor market as a better gauge of economic activity.

Where is the labor going to come from to rebuild Houston, by the way?

The cheerleaders out en masse today with their Goldilocks scenario and talk.

Nonetheless, stock and risk positive in the short term.

 A better way to gauge the tightness of monetary policy is to compare nominal interest rates with nominal GDP growth. An old rule of thumb is that, when interest rates are higher than the rate of growth in nominal GDP, monetary policy is restrictive; when interest rates are lower, policy is expansionary. A crude way to understand this is to see, say, America’s nominal GDP growth as, in effect, the average return from investing in America Inc. If the average return as measured by nominal GDP is higher than the cost of borrowing, investment will expand. – The Economist, October 4, 2001

Nominal interest rates and economic activity are probably more divorced from reality in the Euro zone,  though the stronger euro acts as an effective tightening of policy.  Draghi is going have to do a nice little dance to get through this one.  Another, “whatever it takes” speech.

The FocusEconomics panel upgraded its outlook for the Eurozone again this month, after raising it in the two previous publications. GDP is seen growing a robust 2.0% this year, a notch above last month’s projection, thanks to a firmer labor market, vibrant investment and healthy external demand. Next year, growth is seen as slightly more modest at 1.8% as tailwinds wane.
–   Focus Economics

Add the above concerns to our event risk checklist for a stinging, temporary market disruption,  sometime around October.  That is an unexpectedly sharp rise in market interest rates, probably beginning in Europe that spreads  to  the U.S..

Another positive return in September for stocks, sprinkled with some volatility,  will also lead to even higher valuations and overbought conditions setting the stage for an October correction.

The move to passive investing with the market now on effective auto pilot,  steered by trading ‘bots developed and raised in an age of BTFD quantitative easing,  a decent sell off now requires a plethora of catalysts,  which we do think are coming in October.

One contrarian caveat?  Lots of fast money now bearish and hoarding cash.

 

GDP_Aug30

 

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Trannies Reclaim 200-day, KOSPI Bounces

Posted on August 29, 2017 by macromon

All the major U.S. stocks indices recovered from steep losses, and then some, after the North Korean missile test, though decliners slightly outpaced advancers on the NYSE.

The Dow Transports, which led the recent bout of volatility, reclaimed its 200-day moving average.

Should have seen today’s recovery coming as it was telegraphed early by South Korea’s KOSPI stock index.   After falling 1.5 percent, it bounced off the lows a few hours into the trading session to close only down about 1/4 of a percent.

The KOSPI is expected to post an 88 percent y/y earnings increase this year.  Wow!

Firms in benchmark Kospi will post earnings per share of 236.10 won in 2017, representing an 88 percent jump from last year and the highest profits since 2010, according to analyst estimates collated by Bloomberg. The annual estimate is based on forecasts for individual stocks in the benchmark and is updated throughout the year as analysts freshen their projections.  – Bloomberg, August 28

Not putting much stock in this week’s trading, however, as nobody is around.  Mostly noise with algo flippers in control.  Waiting for the September to remember.

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Kospi_Aug29Kospi_Earnings_Aug29

Dow Transports_Aug29

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COTD: Young Adults (18-34) Living At Home

Posted on August 29, 2017 by macromon

 

Young Adults Living At Home.png

(COTD = Chart of the Day)                                                             Source:  U.S. Census

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