Consumer Sentiment

Market Rally Continues Along With QE

Friday, 17 May 2013 19:28
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There has been a long string of crummy economic data which has largely been ignored (“bad news is good”) by bulls. However, on Friday, bulls jumped on two reports, Leading Indicators and Consumer Sentiment, which released better than expected results (“good news is great”). The most noteworthy regarded the Consumer Sentiment report, which was the largest “beat” in its history. (Read more…) For the most part, the Consumer Sentiment report is less regarded by us than the Conference Board’s Consumer Confidence report since the former is heavily weighted by stock prices. With a rally in stocks, Consumer Sentiment data was likely to beat. And, given that, they tend to feed off each other.

In other news, there wasn’t any slowdown in QE on Friday, with a large POMO action pumping a cool $5.3 billion into the markets, along with options expiration, which generally creates more volatility. We have just another week or so of earnings news left for the first quarter, and as a result, there’s not much left from the sector to support prices.

It’s a “risk on” environment for global equities. This is especially so for countries and regions where central banks are busy printing money. For “risk off” sectors, bonds and commodities are not feeling the love. And, those countries not in the QE game, Latin America and Australia for example, their markets are underperforming.

The dollar (UUP) rose substantially Friday as the euro (FXE) and yen (FXY) especially were weak. The strong dollar caused further selling in gold (GLD) and other commodities (DBC), while oil (USO) climbed higher. Though on a Friday, the latter isn’t unexpected with the Middle East still at a boil. Bonds (TLT) fell back as stocks rallied.

Leading equity sectors? Pick one, as everything jumped higher across the board. Lagging were Latin America (ILF) and Australia (EWA).

We’ve focused our ETF positions on sectors within the major indexes rather than the large indexes in isolation largely because we believe that these sub sectors can outperform the major indexes.

Volume was only slightly higher perhaps due to options expiration toward the close. Breadth per the WSJ was positive.

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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

NYSI

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

VIX

The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”. Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

…

That was the week that was to quote the old TV series. Markets are quite speculative now and the game is being played by hedge funds, banks and overseas investors with free money from the Fed. It’s almost like musical chairs, for when the music stops there will be trouble. This is why you see so much QE pause/start rhetoric which is field testing investor behavior.

Aside from light volume there’s no argument with the tape. It’s quite positive but much overbought. Earnings news is beginning to wane leaving less for bulls to respond to. Many previous reliable technical indicators are succumbing to all the money printing. Looking at those markets where QE is not taking place perhaps reveals the real market conditions.

Next week will yield Fed Minutes, housing data and Durable Goods Orders.

Let’s see what happens.

Key Events And Issues In The Week Ahead

Monday, 13 May 2013 06:50
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In the US, retail sales are expected to continue to slow in the headline, while retail sales ex autos, building materials, and gas should turn positive in April according to Wall Street analysts. Goldman remains below consensus for Thursday’s Philadelphia Fed survey, forecasting a slight improvement on the previous month. The firm also expects the flash reading for Euro area Q1 GDP to come in slightly below consensus, consistent with a shallow contraction. We forecast German GDP will turn positive in Q1 after Q4 2012′s negative reading. In Japan, GS sees Q1 GDP at 2. (Read more…)8% qoq ann., slightly above consensus, with stronger consumer spending the main driver. Among the central bank meetings this week, Russia, Chile, and Indonesia are expected to remain on hold, in line with consensus.

Monday 13th May

US Retail Sales (Apr): Consensus: -0.3%, Previous: -0.4%
Eurogroup Meeting
Also interesting: Australia Housing Finance, Australia NAB Business Survey

Tuesday 14th May

Euro area Industrial Production (Mar): Consensus: 0.4% mom, Previous: 0.4%
Germany CPI (Apr Final): Previous: 1.1% yoy (Flash)
ECOFIN Meeting
India WPI (Apr): Consensus: 5.5%, Previous: 6.0%
Indonesia CB Meeting: policy rate expected to remain at 5.75%
Also interesting: RICS Housing Market Survey, Sweden CPIF, Hungary CPI, Israel CPI, NZ Retail Sales

Wednesday 15th May

US Empire Survey (May): Consensus: 4.0, Previous: 3.0
US TIC Data (Mar)
US Industrial Production (Apr): Consensus: -0.2%, Previous: 0.4%
Euro area GDP (Q1): Consensus: -0.1%, Previous: -0.6%
Germany GDP (Q1): Consensus: 0.3%, Previous: -0.6%
UK Unemployment Rate: Consensus: 7.9%, Previous: 7.9%
Bank of England Inflation Report
Also interesting: US Homebuilders’ Survey, France GDP, Italy GDP, Australia Wage Price Index, Brazil Retail Sales, Czech GDP, Hungary GDP, Poland CPI

Thursday 16th May

US CPI (Apr): Consensus: -0.2%, Previous: -0.2%
US Housing Starts (Apr): Consensus: -5.4%, Previous: 7.0%
US Philadelphia Fed Survey (May): Consensus: 2.8, Previous: 1.3
Euro area CPI (Apr Final): Previous: 1.2% yoy (Flash)
Japan GDP (Q1): Consensus: 2.7%, Previous: 0.2%
Turkey MPC Meeting: CBRT is expected to cut the borrowing rate by 25bps to 3.75% and also hike the Reserve Option Coefficient (ROC) more aggressively, by as much as 30-40bps. Risks are to the downside.
Chile MPC meeting: MPC is expected to leave the policy rate unchanged at 5.00%, with the possibility of a more dovish statement.
Brazil IGP-10 Inflation (May): Previous: 0.18%
Also interesting: US Initial Claims, Norway GDP, Israel GDP, NZ Government Budget

Friday 17th May

US U Michigan Consumer Sentiment (May): Consensus: 77.5, Previous: 76.4
Japan Machinery Orders (Mar): Consensus: 2.8%, Previous: 7.5%
Mexico GDP (Q1): Consensus: 1.1%, Previous: 3.2%

All of the above in chart format via SocGen:

Key Issues for the week ahead:

TOP ISSUES FOR THE WEEK AHEAD

HOW IS THE EUROPEAN ECONOMY DOING?

Since the release of our Global Economic Outlook in March, in which we forecasted a GDP contraction of 0.6% in the euro area this year, most forecasters have come around to a similar view. Since then, survey data have continued downward, raising concerns that also Germany would be dragged into recession later this year. Last week’s strong hard data in Germany however provided some hope, and this week we expect euro area GDP growth to be confirmed at around -0.1% qoq, in line with our March forecast. While a relatively strong rebound is still expected in Germany (0.4% qoq), GDP is expected to continue to contracting in France (-0.2%), Italy (-0.3%) and Spain (-0.5%).

MARKET ISSUES: While expectations of more ECB action have been building, a stronger outlook in Germany is likely to ease pressures on the ECB to act in the short-term. However, the headwinds from continued fiscal adjustments (in Spain and France) and the need for more structural reform (in particular in Italy), imply very subdued growth and inflation outlooks well into 2014.

STRONG RECOVERY IN JAPANESE GDP

Abenomics has brought a weaker yen, breaking through 100 last week, stronger equity market gains and an emergency stimulus package, all of which will boost economic growth. Indeed, high frequency indicators for Q1 strongly suggest that economic activity has picked up. In that quarter, the boost is likely to have come exclusively from domestic demand with net exports likely to have had a small negative impact. GDP should jump by 0.8% qoq after a flat reading in Q4.

MARKET ISSUES: The latest move in the yen will add to the already strong expectation that net exports will soon make a significant contribution to growth. Markets will wonder how much further that yen move can go. At the weekend, G7 ministers concluded their meeting without any official statement, but press reports around the event suggest no significant criticism was raised against Japan.

US RETAIL SALES TO SHINE A LIGHT ON Q2 GDP

The Census Bureau’s advance report on April retail sales will provide an important first piece of the US Q2 growth puzzle. In contrast to the improvement in labour market conditions witnessed in April, headline purchases probably slumped further, contracting by another 0.6% after the 0.4% decline posted in March. Despite the projected disappointing April results, solid momentum heading out of the winter quarter implies that our current Q2 real PCE forecast remains on track.

MARKET ISSUES: The markets worry that the sequester might be damaging growth and weak sales readings might add further fuel to those concerns

KING’S SWAN-SONG

The Bank of England Inflation Report press conference on Wednesday will be one of the last big set-piece occasions for the Governor to present his policy views before he retires from the Bank at the end of June. With no policy action to explain from the May meeting, attention may turn to the longer term performance of the Bank vis a vis its remit and the changes of style and substance that are likely to occur when Mr Carney takes over the helm in July.

MARKET ISSUES: The markets will want to know if the themes of the March and April MPC minutes continued to exercise the minds of the MPC. Namely, does the Committee still fear that further easing might be misinterpreted as a weakening of the Bank’s anti-inflation resolve?

Source: Goldman and SocGen

Uncle Buck Upstages Bernanke

Friday, 10 May 2013 18:20
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Some recent volatility in currency markets began with the Reserve Bank of New Zealand intervening to stem the rise of the Kiwi. At the same time, the Reserve Bank of Australia cut its overnight lending rate. Both actions caused sharp declines in their currencies. (Read more…) These currencies had been a particular favorite of Japanese investors (aka, Mrs. Watanabe) seeking more yield than what’s available in Japan.

All this roiled currency markets Friday in Asia as the yen plummeted further crossing the psychological level of 100 vs the dollar. Bucky rallied against most other currencies feeding on itself Friday in the U.S. This then slammed gold, other commodities and in turn hurt commodity dependent emerging markets. Equity markets in Japan rallied mightily as the yen/dollar cross collapsed. Also JGBs (Japanese 10 year bond prices fell by the limit.) A natural economic competitor to Japan, South Korea, saw its equity market slide as its currency (won) declined to match the yen’s fall. (South Korea still remains a major weighting in the MSCI Emerging Market Index which saw the index slide over 1%) Like falling dominoes, Brazil’s real currency also fell on inflation fears. And so it went.

As Greenlight Capital’s David Einhorn observed in his client letter: “…unconventional monetary policies is now a global phenomena. Other central bankers notice and, acting in the philosophy of ‘Anything you can do, I can do better,’ take turns in one-upmanship. This serially correlated behavior smacks of a bubble mentality. But investors are currently complacent about the unintended consequences of central bank money printing, and like most investment cycles and fads, this will persist until it doesn’t.”

This chaotic market behavior will no doubt be addressed at this weekend’s G-7 meeting in London. Other than calming rhetoric, there is little else they may do since currency wars and QE game is now a “global phenomena”.

The Bernanke Chicago speech became little more than a side show Friday. He did say the Fed was keeping a watchful eye on yield risk-taking given ZIRP. He’s a little late to that observation methinks.

Bond Daddy Bill Gross (PIMCO) tweeted the long bond bull market is over. The statement is honest yet odd since he owns more bonds anyone.

U.S. stock markets didn’t fluctuate too much Friday but beneath the surface conditions appeared more tenuous. Thursday we noted how recent ultra-light trading combined with active algo/HFT trading made the market vulnerable to rumors. Current algos are programmed to pick-up any hints of trouble and run with it before the next guy. That makes markets more accident prone.

Tech (QQQ), homebuilders (ITB), consumer discretionary (XLY) and biotech (IBB) led markets higher. Losers included gold miners (GDX), energy (XLE) and bonds (TLT). The dollar (UUP) rallied sharply while gold (GLD) was the big loser. Commodities (DBC) fell sharply along with energy (USO).

For us carbon-based but systematic investors it’s a battle of trend-following duty vs emotions when dealing with current markets. The higher we go the more systems are challenged to stay with the trend. Taking some profits and raising stops is all one can do.

Volume remains ultra-light despite all the market-moving action from overseas and currency chaos. Breadth per the WSJ was positive.

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NYMO

The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

NYSI

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

VIX

The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”. Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

…

This was a light week for economic data but a heavy week for currency chaos. Bulls gutted it out to close the week with a lift. But we’ve seen other markets roiled particularly emerging markets, Australia and Asia in general.

Next week we’ll get more in the way of economic data (Retail Sales, Industrial Production, Housing data, Empire State Mfg, Philly Fed, Jobless Claims and Consumer Sentiment). Europe will also provide some GDP data. The tail end of earnings and more QE is on the way no doubt.

Markets are overbought from an intermediate term view but corrections have been difficult to come by with all this liquidity.

Let’s see what happens.

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