How Money Impacted GeoPolitics This Week: Trying To Decouple While Staying Interdependent Is Bad Policy But The Bulls Will Take It

With the West fracturing over everything from China and Russia to friendly spying and the intelligence of our intel procedures the leaders of the Free World find a rising equity market and falling interest rates indispensable. And on this score it’s China of all places that’s helping the West, with dollops of liquidity and a policy posture that equates to Ready-Steady-Go. Consequently equities are ignoring signs of economic weakening and grinding higher, with the volatility risk premium 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. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. The action in major currencies indicates the $US is weak. But there was also one negative factor across global asset classes. Gold is trading as a risk-off asset. Expect the S&P 500 to rise modestly over the next few days toward resistance at 4200.

Instead of unreserved celebration over NATO enlargement the West is dealing with squabbles between liberal and illiberal regimes (Hungary and Turkey this week) and within the liberal universe as well (contra France). Decoupling from China is the key issue and here Western leaders can be thankful that financial integration remains robust despite the morphing of Trumpism into Bidenism. The PBOC remains a major source of liquidity, buoying the Chinese markets and extending to other Asian and Western equities. By contrast the Fed is trying to tighten while it loosens, mopping up liquidity created by both the new bank loans and the Treasury’s declining account. The result of speaking with forked tongue is the bond market simply disbelieving what Fed officials say, and instead forecasting interest rate cuts this year.

Similar doublespeak comes from the Bank of Japan, which talks big about ceasing its liquidity-enhancing purchases of JGBs and other assets by September, but the currency markets are growing skeptical. Talk of a liquidity bull market driven by Asian central banks has pushed equities higher and credit spreads, the dollar and volatility lower. But the surge in equity volumes from last week has ebbed and with that hedging via put options has increased, suggesting the rally in US equities will hit resistance soon. Policymakers will need to iron out their differences during the reprieve, else the drop in equities will create a vicious cycle of falling confidence dragging the whole world into recession.

My current positions include a very large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a modestly long position in large-cap equities.