The Latest On The Global Economy: The Bulls Are Breaking Through But Feeding On Hot Air

Confidence in the resilience of the global consumer is powering equity markets against a host of negative geopolitical trends. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is short-term bullish. Yesterday's cross-asset action brought one positive factor for US stocks. The action in the € & EM currencies indicates the $US is weak. But there were also several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The US yield curve is bear steepening. Expect the S&P 500 to rise modestly over the next few days before beginning a new leg to lower lows.

The big question for the global economy and by extension financial markets is the state of the Chinese businessperson’s confidence. Pent-up demand boosts confidence, but realization that Xi Jinping will punish his fellow citizens to guarantee his own political future can only destroy confidence. The market is betting on the former, while I see China losing confidence gradually until an mRNA vaccine is widely distributed. Lockdowns are so destructive that the prospect of repeated lockdowns across the regions of China will outweigh optimism about the sequential reopenings.

Another reason I see declining confidence in China is the huge terms of trade shock and food shortages that some nations are reeling from, and the knock-on effects on their trading partners. This redounds to global trade and that hurts China’s export engine considerably. But the market trivializes this effect and can point to stronger than expected trade numbers from South Korea, which showed both surging exports and imports, indicating global demand is robust.

Against this is the virus of central bank hawkishness which has spread from the US to Europe. The ECB is now discounting any future deflationary dynamic from globalization, which implies a steep hiking cycle that mirrors the Fed’s intentions. And this hawkishness is buttressed by the latest European economic statistics, which reveal the region is muddling through the shocks of war. Europe’s PMI actually improved on 2021, suggesting pent-up demand is here for the summer at least.

The uncertainty over the global economy will likely be resolved in the next few weeks as we begin the hawkish monetary turn with the Fed’s quantitative tightening operations. I expect some disruptions to money markets and that alone will be enough to break the bulls.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.