7 Reasons Why Stocks No Longer Care About Political Shocks, And 2 Why They Should

From Nicholas Colas of DataTrek Research

Why do global equity markets ignore political shocks like Brexit, President Trump’s election or the news that Angela Merkel failed to form a government in Germany? There are plenty of good reasons, actually, which we review below.

News that German Chancellor Angela Merkel failed to form a new government was the big shock of the day. It is unclear if the country will have a minority coalition or call fresh snap elections. The New York Times quoted a Der Spiegel deputy bureau head as saying “This is Germany’s Brexit moment, its Trump moment”.

Capital markets agreed with the Trump/Brexit comparison, sending the DAX up 0.5% on the day. Every other major European bourse closed in the green as well. As did the US.

All of this got us thinking (again) about why stock markets ignore politics and government when it comes to “Crisis moments”. It wasn’t too hard to come up with several explanations.

Reason #1: The Brexit vote and Trump election are fresh in investors’ minds, and they feel they know the “Crisis playbook” well at this point. Buy any notionally negative political headline first, look for the silver linings later. Muscle memory is a powerful behavioral force.

Reason #2: Global equities remain in rally mode, with investors still more afraid of missing out than looking for reasons to sell. Every major global index (S&P, EAFE, Emerging Markets) is either at or near their one-year highs. And with just a few more weeks left in the year, plenty of investors are playing catch up to their ever-rising benchmarks.

Reason #3: US corporate earnings still enjoy positive momentum. With Q3 earnings season almost over, FactSet reports that the most recent quarter showed 6.2% earnings growth. The companies of the S&P 500 even managed to show a little margin expansion (10 bp) in the quarter, and Q4 estimates still show a 10% bottom line growth rate.

Reason #4: Any political crisis is a potential catalyst for central banks (especially the ECB in the case of today’s headlines) to remain accommodative, with Eurozone QE supporting ultra-low long term interest rates and equity valuations. German 10 Year Bunds still yield just 36 basis points, well off their July highs of 60bp. Today’s news was worth all of 0.3 bp to the German yield curve.

Reason #5: Consumer confidence is still good across the US and Europe. Markets rightly feel that any “Crisis” that leaves consumer sentiment untouched is no crisis at all. OECD data on German confidence shows it at one-year highs as of October after drifting lower in prior months.

Reason #6: Energy prices are still moderate. The one sort of crisis that gets investor attention ties headline-worthy events to the price of gasoline. Despite rumblings out of the Middle East, WTI crude prices are still comfortably below $60/barrel.

Reason #7: Tech stocks have driven a lot of the performance in large cap US and EM this year, and this sector enjoys strong secular tailwinds. As we have outlined in prior reports, the Technology sector represents 25% of the S&P 500 by weighting, and 30% of the MSCI Emerging Markets Index. Neither the US President nor the German Chancellor (or any other global leader we can think of) have any impact on how many people stream videos, use social media, shop online, or buy new smart phones.

* * *

Now, does all this mean global markets will remain impervious to political headlines? Of course not. A few thoughts on what might shift the market’s sentiment:

Real Crisis #1: An absence of global leadership on tough geopolitical problems. With Angela Merkel sidelined, Europe has no single political figure to guide the region’s policy on global issues. President Trump, while still popular with his base, is a divisive figure abroad. China’s President Xi is trying to step into the role of a truly global leader, but that’s a tall ask when it comes to American or European democratic sensibilities.

So who is in charge when if/when a geopolitical crisis arises? For the moment, this is not a question investors seem to ponder much. That doesn’t mean it’s not important. It’s just not important right now. Once North Korea/Iran/some other problem gets to a boil, things will be different.

Real Crisis #2: Political fissures can swallow up positive catalysts. As we outlined in yesterday’s note, the Democrats may be able to retake the majority in the House during midterm elections. That makes passage of tax reform in the current Congress an imperative for US equity markets. Past November 2018, Washington may be back in gridlock mode until January 2020.

Summing up, there are plenty of reasons why notional “Crises” have so little effect on global equity prices. Overall economic conditions are still good enough to spur profit growth, and interest rates remain low. Yes, things seem brittle on the political front everywhere from Stuttgart to Seattle. But until a real crisis comes along to break investor confidence, it is hard to see global equities letting any crisis go to waste

One Year Later: These Are The Best And Worst Performing Assets Under President Trump

"A Happy Trumpiversary to all our readers this morning"

       - Deutsche Bank

Today marks exactly 12 months since the US election on November 8th 2016, and as Deutsche Bank writes in "A Happy 12 Month Trumpiversary For Markets?" a lot has happened in the last year, although most surprising may be that for all calls of market collapse should Trump get elected, the S&P 500 has actually soared over 20% in the past 365 days according to Goldman which recently calculated that the Trump rally so far ranks as the fourth-best 12-month gain following a presidential election since 1936, trailing only Bill Clinton (1996, 32%), John F. Kennedy (1960, 29%), and George H.W. Bush (1988, 23%). 

As Deutsche Bank then picks up, "needless to say that the victory was unprecedented and also a massive shock around the world. Following Trump’s victory, it was widely expected that we’d see a much higher chance of fiscal spending but also a reinforcement of the backlash against globalisation and associated forces of which migration policy and trade were probably first and foremost. In reality what we have seen in the last twelve months is plenty of evidence of backlash against globalisation, hostility and controversy, but very little in the way of fiscal policy."

Here is the rest of Jim Reid"s observations on how the market has progressed so far under president Trump.

The debacle around healthcare reform probably best characterises the difficulties the President has faced in that regard. So with today marking the one year anniversary, we thought we would take a look at how markets have performed over that time period. For the purpose of this we’ve included our usual monthly performance assets, as well as a few other US assets. First and foremost after running the numbers what stands out is the sheer number of assets which have seen positive returns. Indeed in USD terms, out of a sample of 41 assets, 38 have seen positive total returns.

 

As we know US equity market performance has been relentless. The S&P 500 has returned +23.5% over the last 12 months and has seen a positive total return in every month since Trump was elected. Interestingly this hasn’t actually been the best 12 month performance for the S&P 500 following an election. That award goes to the 1944 election victory for Franklin D. Roosevelt which saw the S&P 500 rally +36.8% in the year following. The twelve month performance post Trump ranks 7th in the last 23 elections. Meanwhile the Dow has rallied +31.5% and the smaller-cap Russell 2000 index has returned +25.4%. It hasn’t just been US equity markets that have seen blockbuster returns though. Indeed it’s very much been a global rally. The biggest winner is the FTSE MIB (+47.8%) while also in Europe the DAX has returned +34.1%, Stoxx 600 +27.9%, Greek Athex +38.2% and IBEX +24.9%. The UK’s FTSE 100 has returned +21.4% while in Asia the Nikkei is +25.5% and Hang Seng +30.7%.

 

In bond markets, as we know Treasuries have seen some huge ranges but ultimately performance has been benign. Indeed Treasuries have returned -0.1%. In fairness the big move for Treasuries came in the first few weeks of the election victory where we saw 10y yields spike nearly 80bps. If we take performance from the yield highs of last December then performance is actually more like +3.5%.  

 

More significant for bonds though has been the shape of the yield curve. Having spiked as high as 136bps, the 2s10s curve has now flattened to just 68bps and is at the flattest since 2007. The 5s30s curve (79bps) is also at the flattest in 10 years. Alternatively 2y yields have moved from 0.854% on election day to 1.629% now and the highest in the last year. 10y yields were at 1.855% on election day, touched as high as 2.626% in March and are now at 2.309%. The equivalent for 30y yields is 2.616% on election day, 3.212% high in March and 2.770% now.

 

So while equity markets may have benefited from high expectations for fiscal spending, US Treasuries have by and large priced out any expectation with each passing day under Trump’s presidency.

 

In terms of other markets, credit markets have returned anywhere from +2.9% to +14.4% with higher beta credit outperforming (HY and Sub-Financials). Emerging markets have also had been swept up in the rally with EM bonds returning +4.7% and EM equities +28.6%. Commodities have been more of a mixed bag. Gold is unchanged over the time horizon while Silver has dropped -7.8%. On the other hand Oil is up +26.6% and Copper +29.7%.

The Curious Case Of Missing The Market Boom

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

“The Cost of Missing the Market Boom is Skyrocketing”, says a Bloomberg headline today. That must be the scariest headline I’ve seen in quite a while. For starters, it’s misleading, because people who ‘missed’ the boom haven’t lost anything other than virtual wealth, which is also the only thing those who haven’t ‘missed’ it, have acquired.

Well, sure, unless they sell their stocks. But a large majority of them won’t, because then they would ‘miss’ out on the market boom… Some aspects of psychology don’t require years of study. Is that what behavioral economics is all about?

And it’s not just the headline, the entire article is scary as all hell. It reads way more like a piece of pure and undiluted stockbroker propaganda that it does resemble actual objective journalism, which Bloomberg would like to tell you it delivers. And it makes its point using some pretty dubious claims to boot:

The Cost of Missing the Market Boom Is Skyrocketing

Skepticism in global equity markets is getting expensive. From Japan to Brazil and the U.S. as well as places like Greece and Ukraine, an epic year in equities is defying naysayers and rewarding anyone who staked a claim on corporate ownership. Records are falling, with about a quarter of national equity benchmarks at or within 2% of an all-time high.

If equity markets in places like Greece and Ukraine, ravaged by  - in that order - financial and/or actual warfare, are booming, you don’t need to fire too many neurons to understand something’s amiss. Some of their companies may be doing okay, but not their entire economies. Their boom must be a warning sign, not some bullish signal. That makes no sense. Stocks in Aleppo may be thriving too, but…

“You’ve heard people being bearish for eight years. They were wrong,” said Jeffrey Saut, chief investment strategist at St. Petersburg, Florida-based Raymond James, which oversees $500 billion. “The proof is in the returns.” To put this year’s gains in perspective, the value of global equities is now 3 1/2 times that at the financial crisis bottom in March 2009.

If markets crash by, pick a number, 20-30-50% next week, will Mr. Saut still claim “The proof is in the returns”? I doubt it. Though this time he might be right. As for the ‘value’ of global equities being 250% (give or take) higher than in March 2009, does that mean those who were -or still are- bearish were wrong? Or is there some remote chance that the equities are part of a giant planetwide bubble?

Aided by an 8% drop in the U.S. currency, the dollar-denominated capitalization of worldwide shares appreciated in 2017 by an amount – $20 trillion – that is comparable to the total value of all equities nine years ago. And yet skeptics still abound, pointing to stretched valuations or policy uncertainty from Washington to Brussels. Those concerns are nothing new, but heeding to them is proving an especially costly mistake.

$20 trillion. That’s a lot of dough. It’s what all equities in the world combined were ‘worth’ 9 years ago. It’s also, oh irony, awfully close to the total increase in central bank balance sheets, through QE etc. Might the two be related in any way?

Clinging to such concerns means discounting a harmonized recovery in the global economy that’s virtually without precedent – and set to pick up steam, according to the IMF. At the same time, inflation remains tepid, enabling major central banks to maintain accommodative stances.

‘Harmonized recovery’ is a priceless find. But you have to feel for anyone who believes it. And it’s obviously over the top ironic that central banks are said to be ‘enabled’ to keep rates low precisely because they fail to both understand and raise inflation. Let’s call it the perks of failure.

“When policy is easy and growth is strong, this is an environment more conducive for people paying up for valuations,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “The markets are up in line with what the earnings have done, and stronger earnings helped drive a higher level of enthusiasm and a higher level of risk taking.”

Oh boy. He actually said that? What have earnings done? He hasn’t read any of the warnings on P/E (price/earnings) for the (US) market in general –“the Shiller P/E Cyclically Adjusted P/E, or CAPE, ratio, which is based on the S&P 500’s average inflation-adjusted earnings from the previous 10 years, is above 30 when its average is 16.8”– or for individual companies (tech) in particular?

The CAPE ratio has been higher than it is now only twice in history: right before the Great Depression and during the dotcom bubble, when tech companies didn’t even have to be able to fog a mirror to attract billions in ‘capital’. And the chief cross-asset strategist at Morgan Stanley says markets are in line with earnings? Again, oh boy.

No, it’s not earnings that “..helped drive a higher level of enthusiasm and a higher level of risk taking.” Cheap money did that. Central banks did that. As they were destroying fixed capital, savings, pensions.

The numbers are impressive: more than 85% of the 95 benchmark indexes tracked by Bloomberg worldwide are up this year, on course for the broadest gain since the bull market started. Emerging markets have surged 31%, developed nations are up 16%. Big companies are becoming huge, from Apple to Alibaba.

Look, emerging markets and developed economies have borrowed up the wazoo. Because they could. Often in US dollars. That may cause a -temporary- gain in stock markets, but it casts a dark spell over the reality of these markets. If it’s that obvious that a substantial part of your happy news comes from debt, there’s very little reason to celebrate.

Technology megacaps occupy all top six spots in the ranks of the world’s largest companies by market capitalization for the first time ever. Up 39% this year, the $1 trillion those firms added in value equals the combined worth of the world’s six-biggest companies at the bear market bottom in 2009. Apple, priced at $810 billion, is good for the total value of the 400 smallest companies in the S&P 500.

To cast those exact same words in a whole different light, no, Apple is not ‘good for the total value of the 400 smallest companies in the S&P 500’. Yes, you can argue that Apple’s ‘value’ has lifted other stocks too, but this has happened in a time of zero price discovery AND near zero interest rates. That means people have no way to figure out if a company is actually doing well, so it’s safer to park their cash in Apple.

Ergo: Apple, and the FANGs in general, take valuable money out of the stock market. At the same time that they, companies with P/E earnings ratios to the moon and back, buy back their stocks at blinding speeds. So yeah, Apple may be ‘good’ for the total value of the 400 smallest companies in the S&P 500, but at the same time it’s not good for that value at all. It’s killing companies by sucking up potential productive investment.

And Apple’s just an example. Silicon Valley as a whole is a scourge upon America’s economy, hoovering away even the cheapest and easiest money and redirecting it to questionable start-up projects with very questionable P/E ratios. But then, that’s what you get without price discovery.

Overall, U.S. corporate earnings are expected to rise 11% this year, on track to be the best profit growth since 2010. And after years of disappointments, European profits are set to climb 14% in 2017, Bloomberg data show. The expectations for both regions are roughly in line with forecasts made at the beginning of the year, defying the usual pattern of analysts downgrading their estimates as the months go by.

Come on, the European Central Bank has been buying bonds and securities at a rate of €60 billion a month for years now. How can it be any wonder that officially stock markets are up 14%? Maybe we should be surprised it’s not 114%. Maybe the one main point in all of this is that the ECB is still buying at that rate, and thereby signaling things are still as bad as when they started doing it.

Meanwhile, Asia is home to some of the world’s steepest rallies, led by Hong Kong stocks that are up 29% this year. Shares in Tokyo also hit fresh decade highs this week, bolstered by investor confidence before the local corporate earnings season and a snap election this month. “Asia will benefit from continued improving regional growth, stable macroeconomic conditions and undemanding valuations,” said BNP Paribas Asset Management’s head of Asia Pacific equities Arthur Kwong. Any pullback in Asian equities after the year-to-date rally presents a buying opportunity for long-term investors, he wrote in a note.

In Japan, so-called investor confidence is based solely on the Bank of Japan continuing to purchase anything that’s not bolted down. In China, the central bank buys the kitchen sink as well. How, knowing that, can you harp on about increased investor confidence? As if central banks taking over entire economies either isn’t happening, or makes no difference to economies? Buying opportunity?

Global economic growth has been robust in most places, with Europe finally joining the party and the euro-area economy on track for its best year since at least 2010. The region’s steady recovery has eclipsed worries about populism, which a few years ago would have been enough to derail any stock market rally.

No, global economic growth has not been ‘robust’. Stock market growth perhaps has been, but that’s only due to QE and buybacks. Still, stock markets are not the economy.

“I’ve never been so optimistic about the global economy,” said Vincent Juvyns, global market strategist at J.P. Morgan Asset Management. “Ten years after the financial crisis, Europe is recovering and we have synchronized economic growth around the world. Even if we get it wrong on a country or two, it doesn’t change the big picture, which is positive for the equity markets.”

Oh man. And at that exact moment the ECB announces it wants to cut its QE purchase in half by next year.

Nowhere is the shifting sentiment more pronounced than in Europe, where global investors began the year with a election calendar looming like a sword of Damocles. Ten months later, the Euro Stoxx 50 Index is up 10%, Italy’s FTSE MIB Index is up 17% and Germany’s DAX Index is up 13%. The rally is even stronger when priced in U.S. dollars, with the Euro Stoxx 50 up 23% since the start of the year.

Sure, whatever. I don’t want to kill your dream, and I don’t have to. The dream will kill itself. You’ll hear a monumental ‘POP’ go off, and then you’re back in reality.

The Best And Worst Performing Assets In September, Q3 And 2017 YTD

While September and Q3 were the latest solid month for US risk assets, which ended the month and quarter at all time highs, across the globe returns were relatively more mixed for the sample of assets tracked by Deutsche Bank. That said, a large number of assets (21 of 39 in local currency terms) finished with a total return between -1% and +1% which in part reflects another month of incredibly low volatility with the VIX in particular spending much of it trading between 9.5 and 11.0. In the end, excluding currencies 19 out of 39 assets finished the month with a positive total return in local currency and USD hedged terms.

As Deutsche Bank"s Jim Reid reports this morning, in terms of the movers and shakers, commodities dominated the top of the German bank"s leaderboard with Wheat (+9%), WTI (+9%) and Brent (+8%) all finishing with a high single digit return. It’s worth noting however that this does follow heavy falls for the price of Wheat and WTI in August. Equities generally had a strong month, particularly in Europe where a slightly weaker euro (-1%) aided local currency returns. The DAX (+6%), FTSE MIB (+5%), Stoxx 600 (+4%), Portugal General (+4%) and IBEX (+1%) all finished firmer - the latter underperforming however reflecting elevated tension around the Catalan referendum. Returns in USD terms were 0% to +6%. It’s worth also noting the return for European Banks (+5% local, +4% USD) which got a boost from the slightly higher rate environment. There were two standout underperformers in equity markets however. The first was the Greek Athex which tumbled -8% in local terms although still remains up an impressive +19% YTD. The other was the FTSE 100 which fell -1% under the weight of a strong month for Sterling (+4%) following the BoE signalling an imminent rate hike as well as some progress around Brexit talks. Indeed in USD terms the FTSE 100 was up +3%.

There was a similar story for Gilts (-3%) which underperformed other sovereign bond markets during the month. Bunds, Treasuries, Spanish Bonds and BTPs all returned less than -1% in local terms and up to -2% in USD terms. Meanwhile credit market performance was unspectacular given the move in rates. The notable theme was the outperformance for HY though with EUR and US HY up around +1% in local currency terms. More rate sensitive IG indices were weaker however, albeit outperforming sovereign bond markets. EU and US IG Non-Fin, Fin Sen and Fin Sub finished in the range of 0% to -0.5% in local terms.

Taking a step back, for Q3, the big winners during the quarter were commodities and EM markets. Of the top ten in local currency terms, seven fit one of these categories including the Bovespa (+18%), Brent (+15%), Micex (+14%), WTI (+12%), Copper (+10%), MSCI EM Equities (+8%) and the Shanghai Comp (+6%). The FTSE MIB (+11%), Hang Seng (+9%) and Portugal General (+6%) round out the other three places.

DM equity markets were generally up +1% to +5% (S&P 500 returned +5% and Stoxx 600 +3%). The IBEX (0%) and Athex (-8%) were the notable underperformers. Meanwhile sovereign bond markets witnessed very modest positive returns of less than +1% (although +4% for European bond markets in USD terms). Gilts did however return -0.5% in local terms. Credit market performance was solid reflecting a largely carry-return environment. Higher beta credit outperformed (HY and Fin Sub +2% in local terms) while IG indices were around +1% for the quarter.

Finally, here is a snapshot of the best and worst assets, and everything inbeteen, since January 1, 2017.

Germany & Emerging Markets kissing important resistance-

Stock markets around the world remain highly correlated. With this in mind, the German stock market finds itself potentially kissing dual resistance, that could impact stocks in the states.

CLICK ON CHART TO ENLARGE

As mentioned above, the DAX remains inside of rising channel (1) since the 2009 lows. It hit rising support early last year and the rally that followed took it back to line (2), which was the 2015 highs. For a few weeks, the DAX traded above the 2015 highs, until weakness of late. The recent decline now has the DAX back below 2015 highs, which sends a small caution signal to the DAX and other world stock indices.

The weakness of late now has the DAX “Kissing” the underside of dual short-term resistance at (3). If weakness would continue in the DAX just below this dual resistance point, it would send a concerning message to bulls in Germany and the states.

Below looks at a chart of Emerging Markets ETF (EEM) over the past

CLICK ON CHART TO ENLARGE

Similar to the DAX, EEM is kissing the underside of dual resistance at (1). While this important dual kiss is taking place, momentum finds itself at the highest levels since the highs back in 2007 at (3).

Bulls in the states DO NOT want to see weakness creep into the DAX or EEM as both are testing the underside of dual resistance.

from Kimble Charting Solutions.  We strive to produce concise, timely and actionable chart pattern analysis to save people time, improve your decision-making and results

Send us an email if you would like to see sample reports or a trial period to test drive our Premium or Weekly Research

Website: KIMBLECHARTINGSOLUTIONS.COM

Questions: Email services@kimblechartingsolutions.com or call us toll free 877-721-7217 international 714-941-9381

"How Do We Get To The Next Crisis": An Interview With Raoul Pal And Julian Brigden

With the dollar index now 10 points below its recent cycle highs from early January, nervous dollar bulls are starting to reevaluate their initial assumption that this would be a short-term pullback, and many are worried that this could be the start of a new secular bear market. In this week’s MacroVoices podcast, host Erik Townsend invited two of the show’s most popular guests, Raoul Pal and Julian Brigden, two well-respected analysts whose research commands high fees from institutional investors, to discuss complacent equity markets, the timing of the next correction and whether US interest rates will “back up” another 50 basis points.

Townsend started by asking his guests to emphasize areas where they disagree to try and help listeners develop a better understanding of how the two analysts formulate their ideas about markets. But their discussion soon turned to the US dollar, which has been exasperating for the three longtime dollar bulls.

Pal admitted that the dollar’s persistent weakness was beginning to make him nervous as he"s been losing money on his dollar trades for a dangerous stretch. However, he believes the “underlying basis for why the dollar bull market should still be in play” is still there.

“Raoul: My view, like yours, is bullish dollars. Now, the problem is we’ve only had two dollar bull markets in history, one in the early 80s and one in the late 90s. So we have a very small data sample to look at the behavior of dollar bull markets. But what I did notice is no dollar bull market has had a weekly close down more than 10%. Once it goes more than 10% it’s generally a reversal. So that’s a kind of—not so much a line in the sand but a guideline for me.

Now, we’re very much there now. We’re at 9.5% negative on a weekly basis. So it’s starting to make me concerned. There’s plenty of support levels around here as well. I use DeMark Indicators and they are counting towards a reversal. We know that the market positioning is very high. So for me it’s really crucial that the dollar does hold.

I think the underlying case for why the dollar bull market should still be in play is still there. But what we need is some sort of change of sentiment within the market, whether it’s either a renewed belief in much faster rate rises in the US or it’s weaker economic growth. The dollar has a kind of smile where it rallies in either/or but falls when we’re in the Goldilocks phase, which we’ve been having recently. So I’m looking at that.

I’m obviously nervous on my view because it has been going against me. And I’ve been in the trade for a long, long time now so, in Euro terms it’s about 148 and a half. So I’m now really finessing the idea does it move further than here?

If we look at the previous dollar bull markets they tend to go much further, so it would tend to suggest there’s maybe another 15 or 20% upside in the dollar over time. I also look at—and something we’ll probably talk about later—the comparison between this dollar bull market and the dollar bull market leading into the 90s is remarkably similar. The pattern almost fits exactly. And that was the period going into 1999 where we had a correction in the dollar. At that time it went about 8.5% and then it turned around and started rallying as economic growth started falling and rates started easing off a bit. The Europeans at the time were raising rates still. And that whole scenario, we saw actually the dollar go much, much higher. And so that’s what I’m looking for. If I’m wrong, the world’s a different place, and there’s a number of trade opportunities from that. But I still remain a dollar bull but a nervous one.”

Brigden says he remains a committed dollar bull, and sees the greenback rising in either one of two scenarios: the greenback will climb as equities and bond price fall in a "risk off rally" where the dollar becomes the haven asset. His other "risk on" case involves the dollar and stocks climbing alongside yieds. Hoping to avoid confusion with his fund"s long-Europe trades, Brigden also said it"s important to specify what exactly one means when they"re talking about going long, or shorting the dollar.

“Julian: So I think one of the things—and I would concur pretty much with everything that Raoul said—I think one of the observations that I would make is that we’ve got to be a little bit careful of what we call a dollar. Because I think there’s a great temptation to look at some of the dollar indexes, in particular the Euro, and say, well, that’s indicative of what the dollar is doing. And I don’t really believe that is the case.

I think we have been as a shop very bullish, and I think it was on your show, Erik, talking about how we saw the growth pickup coming in Europe. We were singularly bullish, the dollar backing end of April beginning of May, for our clients—sorry, singularly bullish, Euro end of April beginning of May, for our clients. And that was on the break of—we started to see break above 108 in the Euro. In actual fact, we just advocated 24 hours ago to start taking profits in those long Euro positions.

But the point is that things like the DXY are essentially Euros. I mean, they’ve got some Swiss Francs in there, some Swedish Krona, and those are both pegged effectively to the Euro. So you really, I think you have to be a bit careful.

I think what we’ve seen a lot this year is a repricing of the growth-inflation story in Europe. And I think that’s one of the reasons why the dollar has been underperforming. So I’m not quite as concerned about this 10% line in the sand. I think Raoul makes some good observations on that, but I would say that I think to get the next kicker we need to see some developments in story here in the US.

We’re either going to have to see a—and this is my fear—we’re going to see a risk-off dollar rally. So you could have a situation where you can get a correction in bond markets and a correction in equities, and you can actually get the dollar rising because it’s a safe haven vehicle. Or we move into the latter half of the year, we get the Fed to start to shrink the balance sheet—I talked to your listeners about this before—I think that’s potentially a very bullish event. And particularly as well in early 2018 if we get the Trump tax cut.

And my sources in D.C. tell me that still the odds—even though Trump doesn’t seem to be able to put his trousers on straight any day of the week—that the odds are somewhere around 65-70% that we get a tax deal. And it will definitively include repatriation. So I think, to me, I’m still in that structural bull environment for the dollar. But it—we may have quite a few months to wait still. And in that interim, I think what we’re doing is just repricing the Euro.”

Turning the conversation to equities, Brigden said the US market is showing signs of a "classic bubble," meanwhile, rising interest rates and a hoped-for reversal in the dollar would remove two of the fundamental cases for being long equities.

“Just because we’d had this incredibly good run, we think that a lot of the outperformance of the European stock market had been predicated on Euro weakness and also low bond yields. And both of those we think are in the process of changing. So we scaled back our belief in this European outperformance trade at this stage.

I think the US equity market, we seem to be going through this game of rotation. And once again, to differentiate between markets, you know, in the same way that you can’t look at the dollar as just a single thing. What we’ve got is we’ve had up until the last week or so really very aggressive outperformance by a relatively narrow group of stocks. And those stocks—and you know we’ve talked about it in a number of publications—are increasingly looking like what I would call a classic bubble, and I think I’ve talked on your show about a classic bubble. It’s just chart pattern we look for, Erik.”

Meanwhile, Pal said “there are opportunities” in equities among the ongoing changes in underlying market conditions:

“Raoul: Well, for me, I would like go back to the business cycle. You know, we looked at it last year and the business cycle weakened significantly, gained traction again, and bounced again. I mean, it’s done this a couple of times now. It’s tiresome, but it is what it is. Because I much prefer it when we get to the bottom of a cycle—we know when to invest etc. But waiting for this is slightly painful.

But until economic growth weakens in any meaningful way, the equity market will continue to grind higher, volatility will remain low, until something changes. Now there is—and that’s structural volatility. There are opportunities—and I think Julien will talk a bit about this—for spikey volatility where there is an opportunity for a risk-off, which may not be pervasive and may not last very long. We won’t get anything that lasts long and we won’t get a structural shift in volatility until the business cycle weakens.”

Pal also believes that interest rates could head back toward 3% in the medium term if President Donald Trump manages to pass tax reform.

“Raoul: Yeah, again, we need to talk about path and we need to talk about time horizons. So, for me, the path is—I’m less interested in—I think it’s a pretty benign environment for US rates. Yes, if Trump does manage to pass something in terms of economic stimulus in terms of some sort of fiscal policy or taxation, whatever it may be, then can rates back up a bit? Yeah.

But, for me, I’m indifferent from a backup in rates from, you know, 225 where they are today at ten years, to, 275. Fifty basis points I don’t really care, because I think the risk reward is that, at the bottom of the business cycle—which we’ve identified has to come and will come within the next call it 18 months—the bottom of the business cycle should see bond yields at 50 basis points or even less. So that makes, even with a backup in yields to let’s say 275, it still makes it kind of a five for one risk reward.

So, for me, I look through the speed bumps and look at the horizon. The horizon for me is 50 basis points at the bottom of the next business cycle, which has to come. Well, it doesn’t have to come, but the probability is extremely high that it comes in the next 18 months or two years.”

Brigden said that while Pal may be correct, he wasn"t comfortable with the time frame, saying it could take longer for bond yields to start moving higher again. But the more important question is when will we see the next market crisis commence, and how will we get there. That"s the key topic of discussion in the next section:

“Julian: Yeah, it is Erik. I mean, it’s certainly in the next, shall we say, six months. And I think it’s—Raoul and I talk about this a lot and it’s one of the things that I think we believe is one of the strengths of the product: we tend to sort of chew through our stories. And our views are structurally very, very similar, but often our timelines are slightly different in how we get there.

And my concern is I can ultimately see Raoul’s right, I mean, I think we could get another very nasty downturn. I think we could get a—you know, it’s hard to argue against the sort of structural deflationary trends or disinflationary trends that you see globally. The question is how do you get to that next crisis? Do you sort of go quietly into the night, and we walk in one day and ISM stands at 45, and everybody says, wow, QE doesn’t work. Or do you get there a different way?

And my inclination is I believe we’ll actually get there a slightly different way. And at the moment the biggest risk that I see in markets is this chasm between, as I said, equity market pricing and bond pricing. And with that you can throw in Vol. And my biggest fear is that we’re going to get to the next crisis, not via immediate economic weakness, but actually via strength.

And it isn’t so much in the US. As I said, I think there’s a chance that we get a burst of very aggressive activity. That’s sometime in 2018 if we get this Trump stimulus through.

But when I look at the world, actually, my biggest fear—and I think this is interesting for US listeners of yours, because generally Americans don’t look too broadly at the rest of the world, they tend to be very focused certainly in financial networks, they tend to be very focused on what’s going on in the US—I actually think the biggest risk is Europe. I look at European growth models—and we’ve talked about this—but these things continue to strengthen. And the inflation picture, actually, I think is just really going to rip.

And I was reading today how one of my peers was talking about how, for the fourth time, ECB’s going to have to upgrade their growth forecasts. Well, I just think they’re going to have to keep upgrading and upgrading their growth forecasts. And what I fear is that we’re on the cusp of a repeat of events that we saw in the spring of 2015. So, if you remember, at that point ECB had launched QE in the end of 2014, the DAX had ripped higher, and bund yields were locked at zero. And then, one day we walked in and the bund market finally said, screw this, I am repricing because what’s the point of holding bunds at zero, if the DAX is going through the stratosphere.”

Both men are also worried about how shifting demographics, notably how the aging baby boomer generation will impact markets. With the largest-ever wave of retirees set to leave the workforce in the next few years, equity markets are facing a terrifying transition: When millions of buyers are, for the first time, forced to sell.

You can listen to the podcast in full below:

The Market is Lurching Closer and Closer to a Single Day Flash Crash

Whoever is rigging the market is getting increasingly desperate.

The daily VIX slams are getting more and more ridiculous. It’s getting to the point that the VIX is getting slammed 5%-6% every single day at 9:50AM  just to pin the S&P 500 (they’re not even trying to get a gain anymore).

Here’s the VIX.

Here’s the S&P 500’s last nine closes. The index is LITERALLY not being allowed to move. It’s now gyrating a point or two per day.

This level of extreme fixing indicates we’re much closer to the end of this rig than the beginning. The reality is that Central Banks can manipulate some asset classes all the time, but they CANNOT manipulate every asset class at the same time.

Eventually something is going to “break.” Whether it"s Oil, the German DAX, or some other item, we"re going to see the markets call the fixer"s bluff. When this happens, whoever is fixing the S&P 500 will have to let it go.

When they do we"re looking at a single day collapse similar to what happened in May 2010.

You"ve been warned.

For more insights that can help you see serious returns from your investments, join our FREE daily e-letter, Gains Pains & Capital.

Every weekday you"ll receive our research reports before the market"s open.

In the last 6 months we"ve called the massive sell-off in the $USD, the out-performance by Emerging Markets, and more.

And best of all, it"s 100% totally FREE.

To join us, swing by: http://gainspainscapital.com/

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Germany (DAX); Monster bullish breakout test in play, says Joe Friday

Below looks at the DAX index from Germany over the past decade. The DAX index looks to be creating a bullish continuation pattern, that the Power of the Pattern feels, is important to investors in Europe and the St

CLICK ON CHART TO ENLARGE

The lower left of the chart above reflects what an ideal “Cup & Handle” pattern looks like. These patterns historically take place in bull markets and are viewed as “continuation patterns.”

Below looks at the DAX/SPY ratio over the decade and why the ratio could be forming an important pattern too.

CLICK ON CHART TO ENLARGE

Since the lows in 2003, the DAX has been much stronger than the S&P 500. Since 2008, the ratio has traded sideways, reflecting that the DAX and S&P have been traded off being stronger than another, no clear winner. At this time the ratio could be forming a reversal pattern (bullish inverse head & shoulders pattern) near the bottom of a 6-year trading range.

Joe Friday Just The Facts; A breakout above the top of the Cup & Handle pattern would send a bullish price message to the DAX. Strength in the DAX has historically been a positive for stocks in the states.

Bulls in Germany and the States have fingers crossed that the DAX breaks above 2015 highs!

Blog:  KIMBLECHARTINGSOLUTIONS.COM/BLOG

Get our daily research posts delivered to your inbox here

Website: KIMBLECHARTINGSOLUTIONS.COM

Questions: Email services@kimblechartingsolutions.com or call us toll free 877-721-7217 international 714-941-9381

"The European 'Story' Is Broken"

Via Ben Hunt of Salient Partners" Epsilon Theory blog,

George Soros has a great line, one that I’ve stolen many times: “I’m not predicting. I’m observing.” We really don’t have a crystal ball, and it really is a dumb idea to pretend that we do. But what’s not dumb is to keep your eyes and ears open, observing both what the world is telling you (playing the cards) and what other market participants are telling you (playing the players), and reacting accordingly. That’s the heart of tactical investing.

What I’m observing today is that the European *story* is broken. I’m not saying that real world European companies are broken or that real world European economies are broken. In both cases, a few are but most aren’t. What I’m saying is that the buy-Europe!™ story that has been pitched by the sell-side ad nauseam for the past six months is broken and that these stocks are defenseless against the steady stream of anti-Europe political news we are going to endure for the next eight weeks.

Here’s the S&P 500 Index (“SPX”) in black, German DAX Index (“DAX”) in green, and Stoxx 600 Index in red over the past six months:

Source: Bloomberg, as of 02/26/17. For illustrative purposes only. Past performance is not indicative of how the index will perform in the future. The index reflects the reinvestment of dividends and income and does not reflect deductions for fees, expenses or taxes. The indices are unmanaged and are not available for direct investment.

Yes, the DAX has outperformed the SPX over the past six months. Why? Because every sell-side strategist and his cousin has been pounding the table that Europe is recovering and Europe is cheap and why worry about all those elections, anyway, because even if Le Pen wins it’ll just be like Brexit and everything will be fine.

The truth is I don’t know whether or not Le Pen will win in France this May. I don’t have a crystal ball. But what I do know is that nothing is happening between now and those elections that makes it less than a 50/50 coin toss whether Le Pen wins. There’s going to be a steady stream of negative press about all of the candidates from now until then, the difference being that core Le Pen supporters, like core Trump supporters, don’t care about the negative press. There is no story that could make these stocks go UP, but there will be plenty of stories that can make these stocks go DOWN.

And yes, I know that for “patient, long-term investors” and all the Warren Buffett wannabes out there, what happens over the next eight weeks doesn’t matter a bit, and if European stocks go down it just means that they’re even more “on sale”. But what I also know is that whenever I read a sell-side note talking about why something is a buy *today* for “patient, long-term investors”, that’s typically a signal to start shorting whatever they’re pitching. What I also know is that it’s a lot easier to be Warren Buffett when you’ve got $100 BILLION in more-or-less permanent capital from your insurance float. Good for him. Ain’t my situation. I’m guessing it isn’t yours, either.

But the risk here isn’t just a temporary blip on the European horizon. Here’s a picture of 2-yr French bond yields to 2-yr German bond yields (yellow), 2-yr Italian bond yields to Germany (red), and 2-yr Spanish bond yields to Germany (green) over the past six months. If you lived through the summer of 2011, this chart should give you a shiver.

Source: Bloomberg, as of 02/26/17. For illustrative purposes only. Past performance does not guarantee future results.

This is telling you that bond markets are starting to get really nervous about Europe and the stability of the Euro system, and the time frame of their nervousness is over the next two years. Could all this blow over if we get a market-friendly political result in May? Absolutely. And if that happens, maybe I’ll buy Europe THEN. 

But until then, I’ll listen to what the bond market is telling me over whatever Goldman Sachs and Morgan Stanley and the rest of our sell-side friends is pitching me. I’m not predicting. I’m observing.