Rising selectivity in global equities is correct but nonetheless with ever higher highs in major US indexes. And whats more, in the last few sessions, we have significant price moves as lead cyclical indexes of transports and banking have price confirmed the fresh price breakouts. We have to acknowledge there is now plenty of confirming price momentum indicator scores across US risk. We should also note that the recent moves have seen much better breadth and many of the 200 day cross overs have been a false breakdown signal. Unless an immediate reversal, this is now mid wave 5 rather than end wave 5 price action here and this is meaningful in terms of providing a buy signal for non US correlating indexes like DAX for a mean correlation reversion move.
This current global equity selectivity is normal during a wave5 move. If you are frustrated that you are not achieving ever higher highs on your account p&l don’t worry, you will not be alone. This is exactly the normal wave 5 phenomena.
The guys are back from holidays and travel with an important full report though unfortunately missing the last few sessions of price action. We have a now confirmed high momentum, good breadth breakout here on US indexes which should broaden to global equities in spite of a weakening of the US$. Dax, Hangseng trading positional buys around these levels as this appears simply now a wave five chop up on peripherals.
The 2.8% yield on the ust appears now off the table for 2017 and moved to q1 2018. European high yield junk bonds yielding 2% annually. Given historic default ratios inc even -1std from the mean the yield is negative. Congratulations ECB for destroying risk pricing so effectively. Two weeks ago Whirlpool, the washing machine company, with her shares at new 1yr lows issued, BBB rated, ten year paper with a 1% yield coupon!
FX wise the crucial direction of the US$ remains on the table, US$ weakness supportive of US cyclical risk whereas US$ strength is supportive of international cyclical risk. Having said this all cyclical risk is positively correlated. From the guys here on the US$:
“A break of 95.15 would be a huge game changer and imply that a major US Dollar comeback is underway with huge implication for the macros side since this would be clearly bearish commodities and Emerging Markets.”
Given the lead nature of US risk, a confirmed price trend of a rising US$ together with a flattened yield curve would be the final bricks in the indicator wall to complete the end wave five price risk moves. This, together with sentiment, selectivity and price patterns on lead indexes would complete the early indicator work of a trend change direction for price across risk markets. Finally price would need to confirm before a truly directional rather than hedging trade could be placed. This by my practice. From a global multi asset perspective the us equity indexes have been a + beta if not alpha on a relative basis over the last 8 years or so. The prospect soon of taking profits across these equities ahead of a renewal of the US$ cash would add another wave to the relative out performance gains. That would be a sweet scenario indeed.
To the reports:
And here the CS MM tech report that we ran last week
I’m totally with the CS guys here again. The one trade giving me a problem at present is the GBP. The macro news been supportive most recently at a key area of the chart. Vs USD and Euro the GBP is at a pivot area. She promises so much to the down side and there are so many reasons to be bearish but price is not supporting here and now. A trade size adjustment would be the first move. Alert to the chart here. CTFC shows no longer a net short fx candidate. Not particularly long either so a classic pivot area/chop zone.
We have to stay nimble and opportunistic in my opinion here guys. I look forward too next weeks update with great interest as to how these latest moves affect the team’s timing and projections.
For now we have this continued cross asset melt up. The longest consecutive run of higher highs for 22 years today on the Dow and whats more now no clear technical signals of this ending soon. The Goldilocks scenario of cyclical and defensive, junk bonds and treasuries all rising in this mega wave of global liquidity pumped in via the central banks. Growth and yield are given equal merit by global capital. Its a very unusual situation this one.
Finally here to kick off the start of the 2018 forecast reports, GS with their 2018 Outlook.
A very positive outlook re growth but with rising inflationary pressures due to the globally closing output gap. Grant’s latest interest rate observer report also gave a cautionary tale of the 1960s onset of the inflationary wave from a similar positive macro starting point.
We all know the positive and inverse correlations that inflation brings to asset classes i’m sure. 2017 may, in hindsight, prove to be the tipping point in the battle between the deflationary gorilla and inflationary dragon though there is little price evidence to support this case in any bond markets as yet.
All the best
Rich