The Latest On The Global Economy: Resilience Today But Cracks Are Forming

Buoyed by rising credit the American consumer is helping the global economy stay afloat while projections of global growth ratchet down on an hourly basis. With rates rising and employment nowhere to go but down that spells eventual trouble for financial markets. 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 bullish. There are several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The action in currencies signifies $US strength. Expect the S&P 500 to be range-bound over the next few days before dropping in mid-June.

The global economy is muddling through with support from a resilient American consumer but headwinds from uncertainty in China and food shortages from the Black Sea. This week a few Asian central banks raised interest rates aiming to limit inflation from such shortages and defend their currencies from a strong $US riding relatively high and rising US interest rates. I expect this dynamic to persist and global equities to trail lower as better yielding fixed rate alternatives draw investment flows. The major questions dogging investors is whether China can stay open and confident through the summer and whether rising rates crack the American consumer and the tight labor market that gives it ballast.

China’s reopening is uncertain as evidenced by fluctuations across the commodity complex and currencies, with iron ore showing strength while copper declines and the yuan goes nowhere. Across Asia slowing economies (e.g., South Korea) and weakening currencies (e.g., the Japanese yen) increase the odds of yuan depreciation and this raises the unsettling prospect of capital flight among Chinese investors who are already reeling from heavy-handed treatment from Xi Jinping’s pharisaical Communist Party. Any hint of domestic capital flight will topple Chinese equities and spread across Eurasia to Western markets. With American consumer confidence at historic lows any news of financial contagion is likely to pull down spending and slow the US economy to near-zero growth. While I see the US equity market bottoming at 3700 on the S&P 500, the risks to that scenario are to the downside.

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.