Market Outlook | September 8, 2015

“Pain and death are part of life. To reject them is to reject life itself.” (Havelock Ellis 1859-1939‎)

Summary

• More signs of weak global growth are leading to further truth discovery of anemic economic conditions.
• Buyers are losing enthusiasm even in the relatively appealing US markets.
• Federal Reserve and other central banks are losing credibility at a rapid pace.
• Volatility, once suppressed, is increasing these days while expressing the collective uncertainty.
• Failed stimulus policies are now being exposed while the impact on corporate earnings is not fully realized.
• Fragile global economy stifles business confidence, leading to rise of rouge nations and detrimental actions.
• Rejecting the truth is not an option for central banks, policymakers, or investors at this junction.

Ongoing Awakening

Major global indexes are shaken by volatility as various asset classes are re-setting their prices. Meanwhile, regulators in the global arena are slightly panicking ‎and the limitation of central banks is becoming evident. Uncertainly is ramping up at a rapid pace, as felt recently. On top of these big, noticeable themes, the labor numbers in the US are not strong, the commodity plunge has hurt the economies of several nations, and global trade is weakening beyond what's being publicly admitted. Vicious sell-offs in China have been visible in recent weeks, but the Eurozone has been struggling to revive itself beyond central bank stimulated moves. Currency tactics or government press releases are not enough to dodge the truth. Investors are losing conviction on policymakers’ ability to fight the natural and inevitable sell-off. Beyond quantitative easing (QE) many are running to come up with a noteworthy solution. Amazingly, ECB hinted toward further plans of QE (more on this below) while the Federal Reserve sends mixed messages regarding a rate hike. If one does not admit he or she is confused then most likely they’re not a genuine market expert or veteran. Actually, even experts are nervous or at least in major suspense seven years after the last major crisis.

If Brazil and Turkey are considered in complete demise, then other Emerging Markets must be nervous, wondering when the pressure will ease. The endless spins, trickery, and misleading attempts to paint a rosy picture have reached the late innings as reality sets in. “Investors have pulled an estimated $44 billion out of emerging-market equities and bonds since mid-July, according to EPFR Global, a data provider” (The Economist, September 4, 2015). Claiming gloom is not unheard of as pending fear looms in the background. Emerging Markets feeling pain in commodities is one major factor. In addition, the EM currencies are in a fragile state and that’s not subsiding either.

There is some rush to call the bottom, but too many macro issues are unsettled. The August 24th lows in US markets set the benchmark as the critical lows. Eager buyers and nervous sellers ponder the thought of another selling wave. Massive search for the ultimate bottom is underway, but it may take weeks to discover the natural verdict.

Unanswered Questions

A contradictory and puzzling list of unanswered questions:

• How can China continue growth at 7%? Is this possible when global trade numbers are down (from Eurozone to US), especially with low commodity demand?

• How can corporate earnings continue to be insulated from a burning. but interconnected world?

• How come the NYSE exchange is tinkering with the exchange (Rule 48) to ease further selling pressure?

• How does one digest the contradictory Federal Reserve messages?

• How can the Fed raise rates if the world's key economies are clearly slowing?

• If China is slowing while the Eurozone is projecting near zero growth and theUS is sluggish, then what is left?

• What legitimate upside catalysts are awaited by market participants?


Each question above should provide further clues to a near zero growth environment globally.

Consequences to “No Growth”

Several stimulus efforts have glued together a multi-year bull market in the US and European markets. Sure, there are few legitimately appealing companies (and themes), and there is enough capital for investors to seek risky returns or attractive yields. However, at some point, investors will demand to deal with the pragmatic conditions of the “real economy.” Frankly, that’s inevitable and long overdue. Commodities remain in a cyclical decline, the Emerging Markets crisis has not calmed, and even developed markets are struggling to find positive catalysts.

The decline in oil prices creates risky consequences in foreign policy. A country like Russia, in desperate conditions after oil price demise, has less to lose than before. Iran’s entry into the oil market increases supply, creating further unease in oil producing countries' futures. China’s economy’s fragility being reevaluated can lead to shaky actions in the pacific. The tie between China-Russia-Iran is dangerous for Western interest if the global economy struggles to revive itself. Again, when the global economy is weak, key nations attempt to take advantage of the situation, which impacts the attitude of traditional Western business. That sentiment is being tested from Ukraine to Syria, where crisis is looming and wealth creation is dissipating. Not to mention, failed stimulus policies from China to Eurozone are struggling to restore confidence. Thus, crisis mode is not limited to the financial market and forces. Political and military consideration are more relevant in this cycle than prior corrections like in 2011, 2008, and 2000.

That said, policymakers cannot take a casual approach any longer. The stakes are much higher and the healthiest approach of all is to start by confronting the ugly truth soon. It is a painful realization after decades of celebrating globalization. However, without the financial markets fully realizing the severity of economic conditions, a real solution can not be reached. Instead it’ll be deferred further delaying any hopes of substantial recovery. There are eventful days and weeks ahead as the extended inflection point remains in place.

Article Quotes:

“Russian military technology has significantly contributed to the development of the People’s Liberation Army Navy’s (PLAN) surface warfare capabilities – including long-range precision strike – and has made Chinese naval vessels increasingly capable of defending themselves against U.S. air strikes and long-range missile attacks, according to a new report published by the Washington-based Center for Strategic and International Studies (CSIS). While the report treads no new ground with this assertion, it nevertheless provides a good overview of Sino-Russian arms and technology transfers to prop up the PLAN’s surface fleet and expand its burgeoning anti-access capability in the Western Pacific. In that respect, Russian air defense technology, long-range sensors, and anti-ship cruise missile (ASCM) systems have played a crucial role. For example, Russian-made and Russian-derived air defense technologies now enable PLAN surface warfare ships to slip out from underneath the PLAN’s land-based air-defense umbrella and to increasingly operate further away from Chinese shores. In addition, new Chinese/Russian-derived ASCM systems along with long-range sensors can now threaten medium-sized naval U.S. surface ships and even strike U.S. military installations as far as Guam and Okinawa.” (The Diplomat, September 4, 2015)


“When Siemens revealed a €200m investment in a new wind turbine plant at Cuxhaven, on Germany’s North Sea coast, last month, it was hard to know who had more reason to cheer: the 1,000 people who will be employed at the facility — or the European Central Bank. Earlier this year, when the ECB launched its quantitative easing programme, one of its chief aims was to stimulate lending — and in turn encourage more investment in moribund European economies. Without a revival in corporate spending, Europe is at risk of entering a vicious cycle where low economic growth begets weak corporate investment, which then begets weak productivity and lower growth. Disappointing growth is among the reasons why the ECB is now considering beefing up its €1.1tn QE package, with Mario Draghi, its president, opening the door to more bond buying should global market tremors threaten Europe’s still-fragile recovery. Yet the evidence that more aggressive action will boost corporate spending is mixed.” (Financial Times, September 7, 2015)



Key Levels: (Prices as of Close: September 4, 2015)

S&P 500 Index [1,921.22] – From August 5th highs (2,112.66) to August 24th lows (1,867.01), the index dropped over 11%. The last 10 days may hint of a bottom around 1,900, but this may be premature considering the increased volatility and not being at the early stages of a bull market.

Crude (Spot) [$46.05] – August 24th lows of $37. 75 seemed like a cyclical low as Crude prices bounced closer to $50. Yet, surpassing $50 appears like a challenge and a critical inflection point, especially from a foreign policy point of view.

Gold [$1,118.00] – Reflecting the commodity downturn like all assets, the recent low on August 24th for gold stands at $1,080.80. The next critical level is climbing back to $1,180. Limited catalysts within a bearish commodity cycle remain in effect.

DXY – US Dollar Index [96.10] – As it has nearly the whole year, the dollar index remains above 94. The profound theme of the Dollar being the most favored currency lives on, especially as other EM currencies continue to collapse.

US 10 Year Treasury Yields [2.12%] – Once again breaking out of 2.20% is still a major hurdle. Staying above 2% will be a major test in the weeks and months ahead.



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