The Latest On The Global Economy: Dr. Copper Will Give Us Her Prognosis This Week

Cross-currents in geopolitics and the global economy make for extraordinary newsflow this week, and the results can be seen in volatile financial markets. 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), while my technical reading of key stocks in the S&P 500 is near-term bullish but intermediate-term bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise today but fall over the next few days.

Copper tells the tale of the complex currents affecting the global economy. Russian sanctions are limiting supply but higher interest rates are leading to demand destruction, particularly in homebuilding. For the moment the latter is winning out, as copper is floating just above its post-pandemic lows, and any break below this will signal the global economy is in danger of a free fall. Moronic Chinese policies towards COVID combine with Fed hawkishness and ECB impotence to push and pull the global economy in every direction, yielding volatility in the financial markets that’s often breathtaking. The course of the next few days will determine how global confidence fares, and any misstep by world leaders will likely push us far to the downside.

Today’s Fed meeting is the critical first test, as the Fed has already broken with its recent tradition and signaled a change in policy via the Wall Street Journal rather than transparently telling the public what it plans on doing. Expect a 75-basis point rate hike this afternoon, which was unthinkable just a week ago. With Biden issuing contradictory policies at a breathless pace it’s understandable the Fed feels the entire inflation burden rests on their shoulders, and consequently big quick changes are being made. Sadly the financial markets, the labor market and the global economy will suffer for this deficit in dexterity among world leaders.

Yesterday I initiated a modest short position in the markets via the levered ETF SPXU, which I subsequently exited. So my current positions remain a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.