Pro Perspectives 12/6/19

December 6, 2019

Stocks continued to complete the “V” shaped recovery on the week, following the big jobs report this morning. 

Let’s take a look at some charts as we end the week.

First, here’s a look at the “V” in the S&P 500, as we close back near record highs today …

And as we discussed yesterday, we had a similar “V” in the interest rate market …

Today, the notable mover was copper – up 3.2% on the day.  This is where you see some early bets of upside surprises coming for the economy (which fits the theme we’ve been discussing). 

Now, let’s take a look at the sleeper market for next week.  Spanish stocks (and European stocks, in general).  

The media will be focused on the Fed next week, but the bigger event might be in Europe.  As we discussed yesterday, Christine Lagarde will make her debut as the ECB President in her first policy-setting meeting with the governing council.

In recent months, we’ve talked about the prospects of the ECB ramping up the QE program by outright buying European stocks.   Curiously, this week, as U.S. stocks were in an ugly slide, European stocks were holding positive most of the day.  Was the ECB involved?  Maybe.  We will find out next week. 

This data point today on German Industrial Production (down 5.3% year-over-year) will contribute to the case for pulling all of the levers at the ECB. 

 

Additionally, for those readers using gmail, take a look at your promotions or spam folders, and if you find any of my Pro Perspectives notes there, please move them to your inbox.  This will tell email that these are welcome emails. 
Thank you!  Have a great weekend!

 

Pro Perspectives 12/5/19

December 5, 2019

Yesterday we talked about the “V” shaped move in stocks to open December — a sharp down move, followed by a sharp recovery.

We’ve had the same in yields.

As you can see in the chart below, since Monday, the U.S. 10-year government bond yield has done a (near) round trip …

What didn’t move was the market’s expectations on the Fed next week.  The fed funds futures market has been pricing in a zero chance of a cut on Wednesday.  That hasn’t changed, despite the sharp move lower in stocks and market interest rates to start the week.

But as we know, the Fed already has the peddle to the metal – with three rate cuts this year, and with a resumption of balance sheet expansion.  As you can see in the chart below, that has been good for stocks …
Add to this, we now have the BOJ following the lead of the Fed with big, bold fiscal stimulus (5% of GDP).  And expect Christine Lagarde’s debut next week as ECB President, to include pleas to European lawmakers for fiscal stimulus.  With this backdrop, a formal deal with China would unleash a U.S. (first) and (then) a global economic boom.

 

Pro Perspectives 12/4/19

December 4, 2019

Yesterday we laid out the parallels between early October and these first few days of December.  The mood in early October, surrounding stocks (and the risk environment), soured on 1) weak manufacturing data, and 2) more hard ball from Trump, on trade.  We’ve had the same this week.  

And so far, we’ve had a similar response in stocks. First down sharply, then up sharply.

Why?  Remember, back in October, Trump ramped up the aggression against China, and it paid off.  Days later they were shaking hands on a deal. The S&P went on to 2% gain on the month.  

So, yesterday we get more tough talk from Trump on China, giving the appearance that he was blowing up a potential deal.   But as we discussed in my note yesterday, it looked like a repeat of his October tactic – to gain additional leverage, perhaps to get final details of a “Phase one” deal to swing his way.   That appears to be the case.  By last night, reports were saying Kushner’s recent involvement in the negotiations meant a conclusion was near, and there were reports that China was working out who to send to a deal signing (also saying it won’t be Xi). 

So we have this chart on stocks …

How much is a signed trade document worth to the stock market?  A handshake in October was a 7% move in 21 days (from the lows of October, to the end of the month).   

Remember, we’ve been talking about the 1995 analog all year long, where stocks rose as much as 36% on the year, as the Fed was forced to reverse course on monetary policy.  We’re seeing the same dynamic from 2018 to 2019.

With the above in mind, the S&P 500 closes today up 24%.  With a forward P/E still well below 20 and a 10-year yield of 1.75%, a 30%+ year is still in the picture.

 

Pro Perspectives 12/3/19

December 3, 2019

Yesterday we talked about the weak November U.S. manufacturing data, and recalled back to early October, when a big negative surprise in the manufacturing data kicked off a few sharp down days in stocks. 

Two days in, and the month of December continues to repeat the narratives surrounding stocks in early October.  Similar to the start of Octoer, we’ve had a weak manufacturing number.  Similar to the start of October, Trump has been hammering away at the Fed again, pushing for another cut (this time at the December 11 meeting).  And similar to October, Trump has ramped up aggression on the trade front.

It was early October when the headline hit that the World Trade Organization has sided against a longstanding United States complaint against the EU over subsidies that have been given to the European aircraft maker, AirBus — anti-competitive to American aircraft maker, Boeing.  This decision awarded the U.S. the right to sanction the $7.5 billion of EU imports related to the case.

Yesterday, not only did Trump put Brazil and Argentina into the tariff fray, but the U.S. threatened to step up the tariffs on the EU.

What about China?  Back in October, as Chinese officials were due to meet in Washington for a promising round of trade talks, Trump went on the offensive. The Trump team blacklisted eight Chinese tech firms and restricted the visas on some Chinese officials, all of which they associated with human rights abuses on Muslim minorities in China.  This looked like a major spoiler heading into the high level trade talks.

Why did he ramp up the tensions back in October?  Leverage.

Trump always had leverage over the Chinese on these negotiations, and has been in complete control (able to make concessions and pull the trigger on a deal at any time).   But that leverage eroded as economic data began to erode and as the timeline narrowed toward next year’s election.   But Trump found an angle to regain leverage. By taking aim at the human rights abuses of the CCP, he telegraphed to the Chinese how he might bring the rest of the world over to his side, to join the fight.  Did it work?  Just days later, the Chinese Vice Premier was shaking hands with Trump in the Oval Office on a deal.

Fast forward to this week, and Trump, again, has ramped up the offensive on China, though a “Phase one” deal is supposed to be all but “papered.”  Why?  Perhaps its more leverage to get final details of a “Phase one” deal to swing his way.

From a risk perspective (of a bluff being called):  Remember, the central banks are already positioned for a worst case scenario — an indefinite trade war.

Pro Perspectives 12/2/19

December 2, 2019

We start the month of December with some negatives on trade and another contractionary reading on U.S. manufacturing.

Remember, back in early October, we had a big negative surprise in the ISM Manufacturing number – the worst reading in 10 years.  That started October with a few sharp down days in stocks.

In my Pro Perspectives note that day, we looked at this historical chart of the ISM …

As you can see, above the 50 level represents expansion in the manufacturing sector.  Below 50 represents contraction.  The September number (the big negative surprise) was 47.8.  The report this morning, measuring manufacturing activity from the month of November was 48.1 – still in contraction. 

Now, back in my October note, we discussed the commonalities of the dips below the 50 level in this index.  The big one:  Central banks responded in each case.  And in each case, the decline in manufacturing activity reversed.

What’s happening now, in this current manufacturing contraction?  Central banks are responding again.  The Fed has cut rates three times, stopped quantitative tightening and has started aggressively expanding the balance sheet again.  China is firing every bullet it has.  Global central banks around the world are cutting rates.  And the ECB has restarted QE.

So, what should we expect this time?  An about-face in manufacturing activity. That’s what we’re getting, albeit slowly. The manufacturing data in the U.S., China and Eurozone are all moving higher from the lows of the year.

Now, with the news this morning, we kick off December with a down day in stocks.

The S&P 500 remains up more than 24% on the year, but there are clear memories of what happened last December.  Stocks plunged as much as 18% on the month, and finished down 10% — the worst December on record.

What’s the difference?  The Fed and the ECB were proving to be a violent headwind for the global economy twelve months ago.  Now they’ve flip-flopped on policy, and are a tailwind.

As for December in general:  It tends to be a good month for stocks. If we look back at annual returns on the S&P 500 dating back to 1950, stocks are up 74% of the time in the month of December, with an average gain of +1.4%.

Pro Perspectives 11/26/19

November 27, 2019

As we discussed yesterday, with the melt-up in stocks and the easing market angst surrounding trade, the stage is set for some positive surprises in the economic data to start shifting the sentiment on the global economic outlook. 

With that, we had reports on October durable goods orders today, and a second reading on the Q3 GDP.  Both came in hotter than expected.

The October orders for big-ticket manufactured goods (Durable goods orders) were expected to fall – it rose. And instead of a 1.9% reading on Q3 GDP, it came in at 2.1% — another jolt of fuel for stocks.

And now we start looking at the prospects for a big upside surprise in Q4 economic activity. As you can see in the Atlanta Fed’s GDP forecast, the expectations bar is very low (looking for just 0.4% growth in Q4).

 
When the market reopens on Friday, the focus will be on the performance of Black Friday.  With that, remember, we’re beginning to see a rise of the disrupted. And no industry has been more disrupted/damaged than retail.

As we’ve discussed, with the regulatory screws tightening on the disruptors (the tech giants), we may finally be entering the stage where we see the disrupted/survivors, competing, if not beating the disruptors.  If the survivors have moved aggressively to align with the changing economy, in many cases they have the distribution and scale to win back share, if not become the ultimate winner (e.g. Walmart).

Have a great Thanksgiving! 
Pro Perspectives 11/26/19

November 26, 2019

In early October, when the President shook the hand of the Vice Premier of China in the Oval Office, I thought the intent was clearly to signal the end of the trade war (for the moment), to clear the overhang of uncertainty on markets, and move any further phases of negotiations to back burner issues for the global economy. 

We’ve since had a melt-up in stocks. The market angst surrounding trade continues to ease. And with both of these as a backdrop, I suspect we’re going to be seeing a “re-rating” of the economic outlook.

The catalyst will first come in the form of positive economic surprises.  And we have a slate of data coming tomorrow.  We get reports on October durable good orders, the second look at Q3 GDP and inflation data (the Fed’s favored core PCE measure).

The hurdle of a formal deal signing clearly remains important. But assuming that comes — combine that with the ultra-accommodative stance of central banks, and we should expect the market to be on alert for hotter data, and signals that inflation might be on the move.

With that, among the winners today have been commodities.  The economic bellwether, copper, was up 1.1% on the day.

Pro Perspectives 11/25/19

November 25, 2019

Stocks are trading to another new record high today, as we near the last month of the year.

As you might recall, the last month of 2018 wasn’t so friendly. The S&P futures lost 18% peak-to-trough.  It was ugly, and it was only curtailed by intervention.

Intervention?

To counter the indiscriminate selling of stocks, on December 23rd, we had a response from the U.S. Treasury Secretary (a call out to the major banks) and, the following day, a meeting of the “President’s Working Group” on financial markets.  That was an intervention signal.  When stocks re-opened after Christmas the bottom was in — stocks rallied 7% over the last four days of the year.  The S&P 500 is now up 34% from the December 26th low.

What has changed?  The two most powerful central banks in the world (the Fed and the ECB) that were creating a dangerous headwind for the global economy, have since become a tailwind.

As I said in my January 2nd note, if we look back through history, major turning points in markets have often been the result of some form of intervention.  We had intervention, and we had a major turning point.

Now, let’s take a look at a chart of the notable laggard in the U.S. indicies this year:  small caps.  I say laggard not because the small cap index hasn’t had a good year, but because it still requires another 8% to return to the record highs of last year.  But today, it’s finally breaking out.  

 

Pro Perspectives 11/22/19

November 22, 2019

This past week, we’ve discussed the effect of expanding central bank balance sheets on stocks and the economy.  

As Bernanke said in the depths of the financial crisis, it tends to ease financial conditions, which promotes lower mortgage rates and higher stock prices, which promotes economic growth. 

But as we found earlier this year, in the post-crisis environment, removing global liquidity (prematurely) can create the opposite outcome.  The combination of the Fed’s quantitative tightening program, and the ECB’s exit of its three-year QE program late last year, sent global financial markets haywire.

The aggregate balance sheet of the three most powerful central banks (the Fed, ECB and BOJ) in the world peaked in August of 2018.

Stocks went on to post a loss for the full-year, after being positive for the first three quarters.  That’s the first time on record that happened.  And it has the worst December since the Great Depressions.    

Here’s a look back at the chart …
As we discussed in my August note, maybe most damaging factor was the “rate of change” in global liquidity.  In combination the three most powerful central banks had been pumping liquidity into the global economy at a double-digit rate throughout the post-crisis period.  That swung to a negative rate of change in a little more than a year. The world did not digest that well. And that has put the central banks back into action.

But the switch has been flipped.  The aggregate balance sheet of the world’s most central banks has stopped declining, and has now returned to new record highs.  

 

Pro Perspectives 11/21/19

November 21, 2019

The ECB restarted its QE program this month.  The plan is to buy 20 billion euros worth of bonds, indefinitely. 

To refresh your memory, it was just December of last year that the ECB quit the three-year QE program that more than doubled the size of the their balance sheet.

But unlike QE in the U.S., the ECB’s program didn’t do much for European stocks.

With that, we’ve talked about the prospects of seeing the ECB add stocks to the mix in their asset purchase program, in effort to drive investment, and ultimately demand.  The BOJ has done it, with some success (at least for the Nikkei).

Remember, ECB govenor Ollie Rehn said back in August that the ECB should ‘overshoot, rather than undershoot’ on this next iteration of QE.  And he didn’t rule out a plan to outright buy stocks.  On that note, we’ll hear from the ECB again on December 12th, led by their new President (Christine Lagarde).

In the meantime, nothing has been better for global stability that the Fed’s new “don’t call it QE” program.  They’ve bought more than a quarter-trillion-dollars worth of Treasury bills since August, returning the aggregate balance sheet of the big three central banks (the Fed, ECB and BOJ) back to record high levels.