Equity Bulls Are Feeling Exclusive And Drawing Scorn From Their Siblings — What Fixed Income, Currency & Commodity Markets Are Telling Us
Across the financial, business and political landscape there are few resolute optimists and chief among them are the equity bulls. Their siblings across the rest of the financial markets disagree but the bulls rationalize that as envy and expect them to come around and join the party. For the time being that looks to be the case, as the volatility risk premium now 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 neutral short-term and extremely bearish intermediate-term. 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. Copper is pointing to declining global GDP expectations. Expect the S&P 500 to rise modestly over the next few days toward 4480 before returning to earth.
The only segment of financial markets voicing optimism about the global equity is the equity market. While the S&P grinds higher derivatives traders are painting a mild sell signal, both among equities and bonds. The action in treasuries suggests another move up in rates is in the offing, consistent with the Fed’s stated goal of 2 further rate hikes. Credit spreads for high yield remain tighter than their average over the last 5 years. Interest rates differentials are helping drive the dollar against Asian currencies like the Chinese Yuan, Japanese Yen and South Korean Won, pointing to weak Asian growth that requires easy monetary policy, as underscored by yesterday’s weak US trade numbers. With inflation running too hot in the West and growth running too mild across major Asian economies the global economy has few catalysts to pick up steam, despite the jejune expectations of equity bulls.
A more rapid pace of disinflation in the West would reset the global economy but this depends on a worsening American labor market. Disinflation from other sources will be modest, particularly as commodities have already fallen. Precious and industrial metals have broken down and are likely to consolidate here on expectations of low global growth. Fossil fuels are diverging with crude weak but refined gases and distillates consolidating after rallies; most look weak going forward. Most ags, meats and softs are also consolidating. Until we see the Fed and ECB clamp down on liquidity the current bout of mild stagflation will remain, eventually curtailing corporate earnings and drowning the euphoria in equities.
My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.