The Latest On The Global Economy: China Cools, Europe Gets Colder But The US Keeps Simmering
The latest economic variables point to a slow but robust global economy, and that is helping power the markets to retest September’s highs. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. The action in major currencies indicates the $US is weak and the US yield curve is bull steepening. Given that we are approaching September’s highs on such low volume, expect the S&P 500 to be range-bound over the next few days.
While China is officially slowing slightly a more worrisome sign is that Chinese home prices may be declining even more than reported because demand has fallen considerably, implying the real price of homes will decline further to bring back equilibrium. The PBOC is injecting liquidity and this may be to shore up lending even though the official reason noted technical factors regarding the government’s cash balances. So China is cooling but this was expected and the markets’ sanguine reaction shows underlying confidence remains firm.
Key for the global economy is European activity and here politics is throwing a wrench as the German Greens just announced they oppose the Russian pipeline Nordstream 2, which could result in the gas crunch continuing through the winter. So while the global economy is fine, there are potential problems with firms with heavy exposure to Europe.
On the home front the US economy is chugging along despite labor shortages and inflation, while the equity market’s very limited expected volatility (VIX) during this consolidation will have a positive economic impact as American firms will not be worried about macroeconomic issues for the time being. This means they will proceed with supply adjustments and long-term plans for automation, which are good for the markets. Effectively the market’s low expected volatility creates a preordained bullish scenario as firms keep production humming and that powers earnings that power the bull market.
Yesterday I sold my position in the S&P 500 (the leveraged ETF UPRO), leaving me with a small net short position in the index (the levered inverse ETF SPXU). My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Johnson & Johnson (JNJ), 3M (MMM), and Pfizer (PFE).