“The truth is not for all men, but only for those who
seek it.” (Ayn Rand, 1905-1982)
Weakness Reconfirmed
The revelation of further
weakness in US economic numbers does not come as a surprise. As global growth
keeps shrinking, there was this wild optimistic view that US labor was actually
improving. Even if May’s monthly data, which turned out to be abysmal and weak,
was an outlier, it clearly showcases that growth projections were on shaky
grounds. Not to mention, the prettied-up labor numbers of recent years
reflected growth in low wage jobs, while dismissing folks that are not counted
after giving up. Importantly, the number of people participating in the labor
market continues to decline dramatically.
The Fed has to admit failure (the honorable path), admit weakness
in the current environment or find yet another creative explanation to drag the
audience along. The Fed’s creativity in messaging has entertained many,
while the real economy is bleeding severely. Financial markets are feeling the
pressure of the ongoing disconnect between reality and the current trading
levels seem a bit insane, to put it rather mildly.
The Fed’s Crumbling Thesis
Subscribing to the Fed’s
narrative of growth and possible rate hike is a big cinema show, filled with
hype and misleading bluffs. The bond and stock market did not buy into the
growth story even before Friday’s weak job
numbers. US 10 year yields have not reached 2% in a while, and S&P 500
index wobbling around 2,100 confirms even further uncertainty. The
suppressed volatility in US stocks combined with big media’s idolization of
Central Banks is the ultimate toxic climate for risk managers of all kinds.
In other words, professionals shouldn’t be fooled by the PR work of a
government agency (i.e. Federal Reserve); instead, the real economic data show
continued flaws. In addition, the violent swings in political issues from
elections to referendums shouldn’t be taken lightly in risk assessment. The increasing danger now is assuming
Central Banks know what they’re doing. The reality is they do not beyond
deferring any confrontation with reality and by using up air time to calm the
markets by confusing observers. The suspense game played by the Fed is
insulting to many market observers, as the end result of current economic and
market reality is not bound to change overnight.
Suspenseful Macros
A critical inflection point is
visible across key macro indicators. In simple words, suspense awaits. The
S&P 500 index failed to hold at 2,100 several times in the past few years.
Stunningly, last Friday the index closed at 2,099.13, further illustrating the
enthralling climate. Crude has roared back around $50, but a mild pause is
warranted as OPEC deciphers the next path. The intense rift between Saudi
Arabia and Iran is one critical factor in pricing as well as political dynamics:
“Saudi Arabia and its Gulf allies
had tried to propose OPEC set a new collective ceiling in an attempt to repair
the group's waning importance. But Thursday's meeting ended with no new policy
or ceiling amid resistance from Iran. Despite the setback, Saudi Arabia moved
to soothe market fears that failure to reach any deal would prompt OPEC's
largest producer, already pumping near record highs, to raise production
further to punish rivals and gain additional market share.” (Reuters, June 2, 2016)
Meanwhile, the recent rate-hike
posturing ended up being a senseless promise without basis. That said, the US
10 year yield is far removed from 2%, even 1.90% seems distant in this climate
of lower growth and low inflation. Finally, the US dollar has stalled and its
relative edge is taking a break, symbolizing waning momentum. Perhaps, some EM
currencies are being revived and reversing a 2-3 year trend. All these factors do
not account for, “Brexit”, elections, and other less expected results.
In the days and weeks ahead,
traders will have to evaluate their outlook in the Fed’s messaging. Also, those
that naively anticipated a rate-hike may have lost further trust in the Fed. In
all this, a disruption of the status-quo and increased volatility seems
warranted at this state. Buying into illusion is not a sustainable idea
and soon market participants are bound to react resoundingly.
Article Quotes:
China’s industrial landscape:
“Guangdong for three decades created one of those rare
periods in industrial development where everything came together in the same
place at the same time—capital, cheap labor, infrastructure and relative
freedom from controls. The world’s biggest ships, carrying up to 19,000
containers, could dock in Shenzhen and fill up with goods for all over the
world, none of which was made more than 100 miles away. By moving
elsewhere in China, factories may be able to trim wage bills or gain access to
cheaper land, but they lose the concentration of suppliers, logistics and
services that Guangdong has built up over 30 years. Gao Dapeng, CEO of
Desay SV Automotive Co., which makes car navigation systems in Huizhou, said
the overall cost saving of moving to an inland province like Chongqing is only
about 10 percent, and it would mean the plant would be hundreds of miles from
its suppliers. He said the company is not sure if the relocation is worth that.
Yet factories in the province continue to close, stirring discontent. The
number of strikes and protests in China doubled last year, according to the
China Labour Bulletin. Among the 886 incidents recorded in manufacturing, 267
were in Guangdong, three times as many as the next highest province.” (Bloomberg, June 5, 2016)
“Widely followed figures from EPFR Global, a
Massachusetts-based data purveyor, suggest that foreign investors have dumped
Asia ex-Japan equities at an alarming rate so far this year. Yet data from the
Washington, DC-based Institute of International Finance suggest that foreign
investors’ appetite for emerging Asian equities has remained strong this year, hitting 30-month
highs in March. EPFR’s findings are illustrated in the twin charts below. Its
data suggest that investors have withdrawn a net $10bn from Asia ex-Japan
equity funds so far this year, equivalent to more than 3 per cent of assets
under management. This is in contrast to Latin American equities, where the
return of Brazil and Argentina to foreign investors’ wish lists has helped spur
net inflows equivalent to more than 5 per cent of AUM." (Financial Times,
May 27, 2016)
Key Levels: (Prices as of Close: June 3, 2016)
S&P 500 Index [2,099.13] – Unchanged from last week. It is very
fitting that the index failed at 2,100, yet again. It is fair to say, a massive
inflection point awaits.
Crude (Spot) [$48.62] – After the massive move from $26 in February and
until nearing the 50’s range recently, there are signs of a pause. It appears
like a selling match between buyers and sellers is happening at the $48-50
range.
Gold [$1,216.25] – Stabilizing
between $1,200-$1,250. This illustrates an extended bottoming process after a
multi-decade decline. Although the
upside moves are hard to predict or calculate, the recent moves have confirmed
a new/redefined pricing range.
DXY – US Dollar Index [94.02] –
Sharp drop last Friday after the weak job numbers and low odds of a rate
hike. Since late January, the dollar strength has paused.
US 10 Year Treasury Yields [1.70%] – Once again, yields failed to hold above
1.80%, especially with a sharp-drop last week, as rate-hike chatter is slowing
down. This is further signal of weak economic climate and that the Fed lacks
basis for raising interest rates.
Dear Readers:
The positions and strategies discussed on MarketTakers
are offered for entertainment purposes only, and they are in no way intended to
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