Happy Easter guys,
2018 has indeed played out according to the expectation of higher volatility against a back drop of a trend change price distribution and ending of this 8 year bull market for US risk.
As we look across US cyclical risk from the sp500 to the Russel2000 to the nas100 its all still a fairly bullish setup. We have price charts generally showing higher highs and higher lows on confirmation price momentum and good sector strength, inc US Finance and Banking, albeit at record leverage and sentiment levels. Given this set up for US cyclical risk, its still too early to get short here even on a hedging basis by my practice, at least on these charts.
Internationally, as has so often been the case throughout this 8 year bull run in US risk, the technical picture looks so different. Internationally its fair to say, Japan aside, we have remained inside a devastating and historically very rare secular bear market. Inflation adjusting there has been nothing like it since of course the three decade 1920s to end 1940s depression and war. In fact from an economic historical perspective the charts and capital destruction, inflation adjusted.
International indexes US adjusted eg the eurostoxx50 or Hangseng (hkd pegged) things look a little better and although we see price consolidating below the 200 day ma here its still constructive with the 50 above the 200 day. Of more concern are some individual indexes which already weak throughout this US bull mkt have attracted more selling on any US weakness. Its a blood bath in most of peripheral Europe and we can only imagine what might follow to euro risk as well as the social economic fabric of Europe if/when we see a period of global demand weakness and higher rates, (EMPHASIS ADDED).
Tactical moves aside, rates have broken down from their secular bull market and thats a very negative head wind for risk. Keep watching that 2/10 spread for the clear indication of a risk off event. Its getting ever compressed downward at now 50 basis points but that’s an amber alert not red alert level so we still have some room here for risk assets to move higher.
Here the re-confirmation of the breakdown (inverse for rates) of the 10 yr treasury which we actually picked up here as one of the earliest market commentators on the breakdown a few months ago.
Defensive yielding assets have therefore topped out at least on a relative basis to their real term value. From here on in, tactical bounces aside, value will be lost. That means outflows from the asset class of defensives and bonds. And where do those outflows end up?
Which brings us neatly to Commodities. The asset class remain fairly constructive with no obvious break down signals as yet though we can see from the price chart that the warm tail wind of USD index weakness may be coming to its end shortly. The second warm tail of wind of rising inflationary expectations, tactical corrections aside, is likely to sustain. In the longer run the positive correlation for commodities to inflation is the stronger of the two correlations so we must remember this as we likely step forward into that “thunder road” scenario (painted a few years ago) of an inflationary reset.
To remind, when an inflationary reset occurs alongside a US$ debasement the stage is usually set for a super cycle bull market for commodities.
Gold in my view deserves a separate post at this stage in the cycle for macro asset markets. Both technological (block chain) and monetary issues are playing out in a way that is only emerging in the tech. Its too early to get heavily long via leverage precious metals again but we should be alert again to the asset class. A dedicated post is due.
Reports here as a v2..
and here GS CTM (ill try and update tomorrow with their latest).
And here Citi from 21st March
And here JPM on fx
On a personal note im down 3.5% or so year to date. Out performance although dollar adjusted slightly worse.
I continue to invest my resources into enabling volume off market bitcoin transactions. Its a tactical opportunity that i was dragged into initially that has grown into something both tactical and likely strategic. I find myself at the center of a global activity in the space and i’m increasingly interfacing at institutional and ultra high net worth levels across the globe for this activity. The numbers involved are incomprehensible to many. I hope to bring more news of this at soon though i have signed non disclosures to the moon and back so i am unable to go into any specific details. I repeat the offer that if you have some requirement for off mkt btc transactions please reach out.
My final words would be don’t get flustered on risk weakness. Stick to your practice and breath. The end of this bull run is not guaranteed here in spite of what the Swiss team, who i respect greatly, say. The turn is close but no need to be too quick here. It will work its way through.
All the best guys
Rich