The Latest Changes in the Global Economy

Economic events around this world this week have modestly helped the bull market in US equities.

The volatility risk premium points to a higher US equity market over the next few days, but my technical reading indicates markets will back and fill rather than shoot up. Helping sentiment are commodity moves in copper and oil, low real yields and stable inflation expectations ~ 2% implicit in the US yield curve; but limiting equity upside is $US strength against both Major and EM currencies. Expect the market to rise moderately over the next few days.

The big economic developments this week were:

• German floods have dented confidence

• South Korea and other nations are seeing a slowing of growth

• China’s statist actions are crushing Chinese stocks, but not US stocks

German confidence is key to European growth so a rebound in August is critical, given the US is also slowing along with China, South Korea and many other nations. But the key to watch this week is China: the Communist Party is in danger of alienating the public as its thuggish attitude now extends even to its own companies (e.g., private education firms with listed shares). This could limit the heretofore burgeoning capital inflows, while nationals use a short window to get capital out, thus forcing China to respond with more interventions, setting off a vicious cycle. The upshot of this hypothesis is more bullishness for US equities, which are seen as subject to a more stable rules-oriented regime.

I sold my position in Fiserv (FISV) yesterday, and my current positions in the market are long holdings in Korn Ferry (KFY), MKS Instruments (MKSI), Titan Machinery (TITN); and a nearly hedged position (net long) in the SPX (UPRO and SPXU).