2016/05/18 TrendView VIDEO: Global View (early)
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TrendView VIDEO ANALYSIS & OUTLOOK: Wednesday, May 18, 2016 (early)
Global View: All Markets
As the central banks have obviously hit the end of the (very distended) line on effective influence of NIRP (Negative Interest Rate Policy) or further Quantitative Easing (QE), the focus now revolves around to the Fed. Is it indeed now inclined to hike sooner than not if the US economic data remains strong? That is obvious from the weaker US equities activity last Friday into Tuesday on what can only be described as very strong US data across many areas. All of this will come into sharp focus on the April 26-27 FOMC Meeting Minutes release at 13:00 CDT this afternoon. This is more important than usual due to the other interpretation of the US equities weakness. That sees the current stronger US economic data in the context of overall global weakness, and the potential for the US data to weaken once again as well.
That may be what is indeed expressed in the FOMC meeting minutes. It has a well-known penchant for respecting both the US data and the global situation since it backed off from the more aggressive view expressed in its first hike meeting back in December. That was reversed in the lowered future rate hike projections for 2016 at its March 16th meeting.
And this would seem wise, even with the recent bout of stronger data. This is because the broader ‘macro’ outlook remains weak for the developed economies. Consider the OECD Composite Leading Indicators (CLI) that were released last Wednesday morning. The less than optimistic outlook for much of the developed world continues to reinforce our bearish instincts, as you can see in our mildly marked-up version. Especially the weakness of the US, UK and Germany, with stallouts now seeming to start in some of the previously more upbeat European economies, remains negative.
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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 key specifics of the US economic data that improved. There has also been quite a bit of weak economic data elsewhere, yet that has recently been buffered by surprisingly (even suspiciously) strong Japanese GDP and also strength in UK Employment figures. There is also the ECB meeting ‘account’ release on Thursday.
It moves on to S&P 500 FUTURE short-term at 04:00 and intermediate term view at 06:00, with OTHER equities from 08:30, GOVVIES beginning at 13:15 (with the BUND FUTURE at 16:15 including implications of the early March expiration rollover) and SHORT MONEY FORWARDS from 18:30. FOREIGN EXCHANGE covers the US DOLLAR INDEX at 21:15 EUROPE at 23:00 and ASIA at 26:00, followed by the CROSS RATES at 28:30 and a return to S&P 500 FUTURE short term view at 31:30. We suggest using the timeline cursor to access the 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.)
▪ The market responses to all of that strong US economic data reinforces the concerns about the overall global economic performance into the balance of 2016. Rather than simply looking at how the data is progressing, at times it is important to ask what the markets are telling us in their own right. US equities that finish the week under pressure in spite of strong data are a classical sign of a bear market shaking off near term positive data to reflect the overall trend. Possibly even more interesting is the US govvies finishing last week three-eighths of a point higher in the face of the sort of data that would normally knock them down. And govvies continue to hold up fairly well in the face of the extended stronger US (and now Japanese and UK) economic data.
While that could end in the wake of the FOMC Meeting Minutes release this afternoon, it just doesn’t make any sense on the short-term view, unless longer term instincts took past the recent economic data. And that also points up the foreign exchange anomaly of the US Dollar Index rallying on that stronger data in spite of weaker equities performance. The idea that the stronger data might leave some feeling the Fed will indeed be within its rights to raise rates again sooner than not does not fit with the govvies resilience.
It is possible that the foreign exchange is simply trading off the data and ignoring the message from the equities and govvies. Yet the other possibility is that there will indeed still be more weakness in the global economy, and it will typically affect other countries more than the still resilient (if not actually` bullish) US economy. Under that scenario the equities can weaken while govvies strengthen, yet the greater weakness elsewhere will leave the US dollar a ‘haven’ currency that strengthens in spite of equities weakness.
▪ As we have anticipated for a while and noted more pointedly on the recent equities weakness in spite of the still quite accommodative central bank positions, what we are now seeing is the denouement of the extended multi-year central bank efforts to rescue economies that climaxed in the recent US equities rally. That was on display once again in last week’s still very accommodative Bank of England press conference after the very predictable ‘no change’ in its 0.50% base rate. The BoE pointed out the rightful nature of its caution due to the likely economic drags already apparent prior to the June 23rd UK referendum on European Union membership.
Yet that does not explain the overall weakness of the other developed economies in spite the occasional bits of stronger economic data. Once again we reference last Wednesday morning’s OECD Composite Leading Indicators (see above.) The UK referendum might be weighing on their economy, yet does nothing to explain the weakness of the other developed economies that now seems to be infecting previously more upbeat Europe.
▪ As we have anticipated for a while and noted more pointedly on the recent equities weakness in spite of the still quite accommodative central bank positions, what we are now seeing is the denouement of the 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.
The weakness for some of the major developed economies in the OECD Composite Leading Indicators noted above is another sign that years (and in Japan’s case decades) of QE and recently sustained very low interest rates are not restoring the robust growth from prior to the 2008-2009 financial crisis.
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 be at the top of a more major bear phase, and we refer you back to those for that insight. That Thursday morning Special Alert: Equities Critical also refers back to more meaningful previous ‘macro’ analysis of the economic data, central bank efforts, and the risks in the lack of structural reform from the political class.
This is a good reason why diminished global trade (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 TrendView VIDEO ANALYSIS & OUTLOOK is accessible below.
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