2016/02/09 TrendView VIDEO: Concise Highlights (early)
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TrendView VIDEO ANALYSIS & OUTLOOK: Tuesday, February 9, 2016 (early)
Concise Highlights
It is another fairly wild morning, with equities back under pressure after attempting to stabilize overnight in Europe and the US in spite of the turmoil in Japan. This is of note not just for the sheer technical trend evolution, yet also for the driver that seems to be questions over European bank stability. There is reason why the questions over European banks earlier this decade created such a problem for the markets. That is of course because of their importance to the overall health of the European economy. Once again in this case, if the crisis mentality can be addressed then the situation might improve fairly quickly.
This is probably one of the key reasons that the ECB's Mario Draghi significantly shifted his view out of being less accommodative in early December into much more expanded Quantitative Easing (QE) potential at the January press conference. It would seem that he might have realized along the way the expected recovery in Europe was not proceeding anywhere nearly as well as either the ECB's or others’ expectations. As we have been pointing out for many months, the idea that Europe would lead the way back up with so many of the other major economies suffering was a misguided expectation.
And that surfaced once again in one of our favorite intermediate-term economic forecasts when the next set of Organization for Economic Cooperation and Development (OECD) Composite Leading Indicators (CLI.) As usual, 'glass is half-full' folks at OECD attempt to put a sanguine headline on what is further deterioration of the global economic situation; especially as regards the supposedly upbeat US.
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Video Timeline: It begins with macro (i.e. fundamental influences) mention of the return to weaker data overall that was apparent in the Bank of England holding the base rate steady at the 0.50% all-time low on last Thursday and indicating it was not interested in following the Fed’s rate hike lead. That was reinforced by all of the weaker data we have seen of late, especially the news out of Germany, which OECD is now seeing as weaker as well.
It moves on to S&P 500 FUTURE short-term view at 03:45 and intermediate term at 06:30 with a view of the very long term trend on the monthly chart at 08:00, and then only mention of OTHER EQUITIES from 09:45 and GOVVIES from 12:00 including the BUND at 13:00 and SHORT MONEY FORWARDS from 14:00. Foreign also only mentions the US DOLLAR INDEX at 15:00, Europe at 15:30 and AUD/USD at 16:30, with the only other chart views on the critical USD/JPY at 17:15 that include the major monthly chart view, with only mention of CROSS RATES reflecting the same tendencies as elsewhere at 20:30 prior to returning to the S&P 500 FUTURE short term view at 20:45.
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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 last month 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 into 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.)
▪ The degree of future weakness implied by the February OECD CLI is striking insofar as they point to additional weakness in the US, UK, Japan and Canada even if China seems to be attempting to stabilize from already depressed levels. However, among the most interesting indications is the general expectation of further growth in Europe even though Germany seems to be turning back down.
Of course, that is very consistent with the weakness in so much of the recent German data including this morning's Industrial Production and Trade Balance. The only surprise for us is why anyone would be surprised that an export oriented economy would be suffering as China and emerging markets we can so markedly. That current weak data is after the previous weakness in the German IFO economic survey and Factory Orders. And with Germany as the heart of the European economy, even more so than previous it is looking like it is not going to be leading any of the other global economies higher.
It is also important to keep in mind that the OECD Composite Leading Indicators are just that: leading. The release on Monday morning was actually December’s indications with the typical two month delay. OECD does that to ensure the data is as solid as possible. Therefore, these six-month ‘leading’ indications are actually a four-month forward view from the time they are released. It is one of the reasons we find them so effective as a market anticipation tool for the equities that typically trade on a 90-180 day expectation for what the economic data will likely bring.
▪ Yet there is another factor that is very likely weighing on equities and bolstering govvies: The Fed’s ‘normalcy bias’ that we will learn much more about as Janet Yellen testifies before the US Congress on Wednesday and Thursday of this week. Her prepared statement that will likely be the same for both sets of testimony will likely be released shortly before her initial appearance in front of the House Financial Services Committee as 09:00 US Central Standard Time on Wednesday.
As we mentioned previous, Friday’s US Employment report’s mixed indications have actually been toxic for the equities. The lower than expected Non-Farm Payrolls gain that might have been seen as encouraging more accommodation from the Fed was offset by quite a bit stronger than expected Hourly Earnings (up 0.50%) and Unemployment dropping down to 4.90%.
Those two items restored more hawkish Fed possibilities right into a weakening hiring picture that made it more so a ‘this news is just good enough to be bad’ psychology for the equities. So whether we hear a slightly more accommodative Ms. Yellen on Wednesday and Thursday or more talk of things being so good with the US economy that further hikes are necessary is going to be a very important indication for a global economy that obviously misses the previous accommodation from the Federal Reserve.
And there was a foreshadowing of how much that might weigh on the equities and assist the govvies as well as further depress the recently weaker US dollar. That was the market response to the typically hawkish New York Federal Reserve President Dudley’s remarks last Tuesday that spilled over into the market reactions last Wednesday. He was significantly more dovish than usual, even going so far as to note that conditions might not have been quite as strong as the FOMC assumed when they hiked US base rate for the first time in almost ten years back in December.
Though the equities took some initial comfort from his dovish revisionism, the extended influence was for markets to be very nervous over the possibility that the December FOMC rate hike was indeed a mistake. That said, it is constructive in the intermediate-term if the Fed has finally realized it is suffering from the ‘normalcy bias’ that we highlighted even prior to the December meeting, and even more intensely immediately after the rate hike announcement and projections. See our Fed’s ‘Normalcy Bias’ Continues December 16th post on that; especially the degree to which the Fed's projections for growth, inflation and interest rates were self-contradictory at that time.
However, in the current global economic data and market volatility environment, that puts a lot of emphasis on whatever Fed Chair Yellen has to say over the next couple of days. Any sign that the Fed is both confident the US economy is continuing to improve and will be mostly ignoring the obvious weaker factors there as well as the global weakness will be a very negative influence from the equities.
Into and after that initial FOMC hike on December 16th we had a simple test for whether it was actually the right move: watch the activity in the long-dated US fixed income. If yields went higher it would be a vindication that the Federal Reserve rate increase was probably the right move. On the other hand, if yields weakened across time that it would be a sign that the rate hike was misguided. The markets have spoken.
In addition to any of our other analysis, we suggest a review of last Friday's Commentary: FOMC – MPC Battle? on how the Fed seems out of step right now with other central banks that are attempting to offset what is a return to a cyclical weakness.
▪ All of the rest of the psychology and technical trend indications are explored in the full Market Observations below even though this is just a Concise Highlights TrendView video analysis. That is due to our desire to wait until this morning to see the further market evolution after Monday afternoon’s erratic reactions in the various asset classes. And of course, based on what we were seeing at present, we are glad we waited.
The TrendView VIDEO ANALYSIS & OUTLOOK is accessible below.
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