The Latest On The Global Economy: Moderating Confidence Is a Prelude To Declining Trust In Global Economic Leadership
American and Eurasian leaders will face big tests of how they manage the global economy and the overwhelming odds are they flub it and send global investor confidence plummeting by the end of July. For now economic data has moderated and investors have reacted by rallying the markets on hopes the worst is behind us. 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 neutral. 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 was also one negative factor across global asset classes. The US yield curve is bear flattening. Expect the S&P 500 to be range-bound over the next few days before falling in late July.
The bear market rally in progress takes inspiration from moderating declines in American economic indicators and the consequent optimism that a soft landing is possible. Housing data have held up, as have diffusion indices concerning retail sales, manufacturing and services output. Commodity inflation is reversing and investors take heart from the fact that currency markets are naturally cyclical rather than bullish or bearish, so the profit drop that MNCs suffer from now could easily reverse course as the $US eventually comes back to earth. Sadly this optimism is overbalanced by negative geopolitical developments that likely redound to the benefit of the $US, pressuring global growth, decimating profit margins and boosting the trade deficit.
Key is the Italian situation, where Mario Draghi is tasked with working political magic to keep the far right out of power. Should he fail, the prospect of denomination risk rises, which boosts the $US against the € and keeps the pressure on EM currencies. Similarly the prospect of diminished Russian gas shipments and consequent rationing can only boost the $US. The ECB will be tested tomorrow on how they deal with Italian politics and energy supplies, and if history is a guide then the ECB will drain confidence the more it tries to shore it up.
China is the other great geopolitical risk for capital markets, as the average Chinese is fed up with command and control policies that mask bad decisions. Chief among these blunders is the COVID strategy. China mRNA development has been too poor to shift Xi Jinping from his coveted zero-COVID strategy, and that means China is not a stimulus for the global economy, but a drag. Much of what China focuses on are next-generation vaccines which are naturally speculative and take considerable time to develop and approve relative to mRNA vaccines. So uncertainty over Chinese growth won’t ebb anytime soon, and that means lower lows in global equity markets lie ahead.
Yesterday I added a small short position via the levered ETF SPXU. Consequently ,y current positions are a large but slightly smaller cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETFs UPRO and SPXU