2016/06/07 TrendView VIDEO: Global View (early)
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TrendView VIDEO ANALYSIS & OUTLOOK: Tuesday, June 7, 2016 (early)
[GENERAL UPDATE Market Observations updated Wednesday morning]
Global View: All Markets
We seem to have an answer for the good question we posed Monday on whether the US equities could go from a “good news is good news” market to a “bad news is good news” market in less than one trading session if a key data set gets weak enough fast enough? The answer is “yes.” Friday’s very weak +38,000 US Nonfarm Payrolls number saw the US equities hold key lower support and rebound nicely on the day. Fed Chair Yellen’s Monday speech responded to the weaker than expected report with a more circumspect view of when any future FOMC rate hike might take place. That seems enough for now to keep the bulls in control of the trend.
As it had been obvious of late that the ‘Normalcy Bias’ Bunch at the Fed were back in full force after previous somewhat stronger US economic data, it was interesting to see the hawks back on their heels (or more appropriately have their wings clipped?) Ms. Yellen has played the conciliator before. As such, her dovish removal of the “in coming months” language from the likely horizon for the next possible FOMC hike was no surprise.
Of course, both the very weak US Nonfarm Payrolls number and subsequent expected softening of the Fed’s rate hike view was good for the govvies and quite a burden for the US dollar. When the equities are rallying on central bank-driven “bad news is good news” psychology, the govvies can also be inspired by weak data. There is no rigid requirement that they trend in opposite directions. The question for the equities now becomes just how much ‘bad’ news is still ‘good’ news? Central bank accommodation can help drive a ‘risk-on’ chase for yield. Yet, if the data becomes too much weaker, equities can suffer from the diminished economic expectations. We saw this back in August and again in January. And it gets back to the premise we have stated many times (see below.)
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Video Timeline: It begins with macro (i.e. fundamental influences) discussion of some of the factors noted above as well as the mixed nature of all of the recent data. It also mentions the other key data this week that includes important Trade Balances that work hand-in-glove with Wednesday morning’s OECD Composite Leading Indicators.
It moves on to S&P 500 FUTURE ‘Quick Take’ up to 02:30 followed by the short-term at 04:45 and intermediate term view at 06:00, with OTHER equities from 09:15, GOVVIES beginning at 12:30 (with SEPTEMBER BUND FUTURE at 15:15 including implications of expiration rollovers) and SHORT MONEY FORWARDS from 17:15. FOREIGN EXCHANGE covers the US DOLLAR INDEX at 20:15 EUROPE at 22:00 and ASIA at 24:45, followed by the CROSS RATES at 28:00 and a return to S&P 500 FUTURE short term view at 30:45. We suggest using the timeline cursor to access analysis that is most relevant for you.
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Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion and TrendView Video Analysis and General Update. Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion.
NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December that in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize in 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? (even though the actual crash was deferred into 2008.)
▪ Even in the context of a less hawkish Fed, any return to significantly weaker economic data also still fits in with the broader scenario we have anticipated for a while. Previous and current equities weakness outside of the US in spite of still very accommodative central bank positions is glaringly apparent. The DAX equivalent of the levels the levels the June S&P 500 future is nearing at present are up in the 11,600-11,900 area. While it has grudgingly allowed the US to lead it back above 10,000-10,100, it is not even as yet testing the 10,475-10,550 area it managed to reach on the June S&P 500 future rally to the 2,105 April 20th high. That speaks volumes about the relative weakness of the global economic data and future prospects.
This is still likely the denouement of extended multi-year central bank efforts to rescue economies that climaxed in the recent US equities rally. Yet that was without essential assistance from structural reforms from the political class. As emphasized ever since our February 9th Fear & Loathing in Marketland post:
The next financial crisis will occur when the investment and portfolio management community (and ultimately the investing public) realizes that the central banks alone cannot restore the robust growth from prior to the 2008-2009 financial crisis.
▪ It is also interesting that the next set of Organization for Economic Cooperation and Development (OECD) Composite Leading Indicators (CLI) are due Wednesday morning. Those are essentially a four month forward view. And they have shown some modest improvement in emerging economy tendencies of late, yet with a very weak outlook for the more important developed economies that are more important to overall global economic performance. Especially the weakness of the US, UK and Germany in the last release on May 11th (our lightly marked-up version), with stallouts now seeming to start in some of the previously more upbeat European economies, continued a negative trend that began in early 2015. And in addition to the sustained CLI weakness, in all of its global economic outlooks the OECD (along with the IMF) has stressed the weakness of international merchandise trade as an indication that a more significant economic contraction may be very close at hand.
▪ Just to explore that international trade weakness a bit further, it is instructive to review both the previous as well as current OECD statistical release. The early March release of Q4 2015 International Trade stats was bad enough. As the highlighted sections emphasize, both exports and imports feel for the sixth and seventh quarters, respectively. That was exacerbated by the exports fall for large oil producers, yet with poor export figures for most of Europe and the UK. The summary paragraph begins with a key insight “For the year 2015 as a whole, G20 exports fell by 11.3% while imports fell by 13.0%. Declines in both imports and exports were recorded in all G20 economies in 2015.”
Think about that as a precursor to the Q1 2016 International Trade stats that open with the title “Slowdown in global merchandise trade accelerates in Q1 2016.” Further (from the opening assessment) “G20 total international merchandise trade, seasonally adjusted and expressed in current US dollars, contracted further in the first quarter of 2016, approaching six-year lows, as crude oil prices continued to fall. Exports fell for the seventh consecutive quarter (by 3.8%), while imports fell for the eighth consecutive quarter (by 4.1%).”
And this continued greater shrinkage in imports to a greater degree than exports is one of the key dilemmas facing the global economy even when some economic data improves (most notably in some of the US figures.) When production industries had excess production in the ‘old days’ they would simply layoff a few workers and pay the severance fees. Yet in a sluggish global economy employment is a political hotspot.
So maintaining employment taking precedence over sound business decisions means that production stays high until whole industries implode. That economic weakness is part of the reason exports are weak, and imports are even weaker. This is a tendency we have been highlighting for some time in the monthly trade figures for quite a few countries. Their headline Trade Balance appears healthy, yet only because imports are so weak that it leaves a net positive figure in spite of weak exports.
All in all a bad devolutionary situation, compounded by weakening corporate earnings. We have already explored the very interesting bloated nature of ‘adjusted’ corporate earnings in spite of recent downgrades through a recent excellent analysis courtesy of the Financial Times’ John Authers. There is good reason why serial weak import figures even for economies running positive trade balances and sinking corporate earnings (even if they always beat manipulated estimates) are a problem. See our previous letter the Editor at the Financial Times was kind enough to publish for a very brief overview on that combined negative impact.
▪ The extensive analysis of the broader ‘macro’ background in previous posts (especially the Thursday, April 28th Special Alert: Equities Critical) has already explored all of the reasons the equities might still be at the top of a more major bear phase in spite of the recent improvement in the US economic data. We refer you back to those for that insight. That Thursday morning Special Alert: Equities Critical also refers back to meaningful previous ‘macro’ analysis of the economic data, central bank efforts, and the risks in the lack of structural reform from the political class.
The TrendView VIDEO ANALYSIS & OUTLOOK is accessible below.
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