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Readers who have been in the markets since the good old QE days would have recalled how sensitive the monthly US Non Farm Payrolls data was to global equities in general, along side how changes in the 10Y yield move the dollar then. Then we had a period where by bad economic data would be a boost to the equity markets as it prompts an extension to the QE program, or for MOAR QE. I recalled this was during the 2011-2014 period where by I was still a student graduating to a trainee trader role for my first job + no wrinkles then when I laughed hard.
Then came the period of everlasting happiness where global equities rallied hard from 2015 to current 2018. This was a period of stable growth in the USA, alongside good recovery in Europe and a successful deleveraging theme in China. No bad news (Brexit + Trump election win) is bad as the main trade was to just sell volatility / buy equities or be punished!
And from what I could recall, all this came to an end on the short volatility trade blowout on the S&P500 VIX Index. Readers could get a better feel of this from my first blog post. I will take this vol blow up as equivalent to a bad breakup as global equities must realize that there is now possibly no more support to them now as the few main factors to keep the market supported is now no longer available / viable given new headwinds.
I was having a discussion with friends on what to expect for the equity markets for the coming week, and the sudden thoughts of "at what stage we are now" hit me. I ran though some thoughts of financial markets happenings and as summarized in the sections below which I hope is helpful to all readers.
In Short, we are back to the period where by good news is bad news, bad news is good news. This has been proven this week by rising US yields on the back of strong US corporate earnings , less trade war / real war squabblers, strong commodity prices which put us in a possibly stagflation period of lower growth and higher prices which will put a drag on equities.
Major indices ended the week lower than the previous Friday close, a win for the bears who nearly got knocked out of the game on the mid week rally, which was followed by a spike in US Yields which had yet again proved us bears right to sell every bounce when we had the opportunity to.
At what stage are we at now?
After the big vol blowout in Feb18, global equities have been form a descending triangle for the S&P500 , DJI , Nikkei225 , DAX. The Hang Seng Index and China A50 has been particularly weak due to HKD intervention causing a rise in rates in Hongkong, the latter due to market economic opening in China, in which not even a 100BPS RRR cut is able to save the market as proven this week. ( or could there be more bad news we don't know? PBOC please enlighten us)
I put this as investors being confused at even which stage of the business cycle we are at now, as we start to observe weakening Global PMI and expections of growth peaked.
Central banks are confused as well and testing their luck by signalling the impression to the public the recent weakness is transitory, as any of their assumptions to slowly economic growth if made public is likely to be proven correct eventually if asset prices take a fall. ( Chicken or Egg causality dilemma)
We are at the stage whereby there is much confusion and it seem the only thing that can determine what's next, is asset prices continued support in rising markets which will kick all troubles down the road, or in the case of a asset price devaluation, whereby will bring out central bankers worst fears.
As explained in charts as below are various new headwinds the economy and equities face to further reaffirm our sell any bounces mentality in Global Equity markets.
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1. Rising USD 3M Libor vs corporate debt
3M USD Libor has been rising steadily along side higher US yields as the market continue to affirm for 4x hikes this year in which one was already done. Rising yields is negative for businesses and property markets as US dollar borrowers face higher cost of financing which will ultimately undermine net profits. Rising US yields have also prompted yields in Asia to rise like in Singapore and Hongkong.
One huge factor to watch as financing cost continue to rise would be reduced corporate buybacks which has been a main driver for the rising equity markets globally in the past 3 years. We have reached a stage where by Libor + Bank Spread would compute to a all in financing cost of around 3.3-3.5% for large corporate companies , in which is near a stage where by management is better off paying down debt, then compared to issuing buybacks to reward shareholders.
Cost of financing US firms double A rated debt is 3.39% which is rather inline to cost of funds currently. Any move higher would trigger a change in buyback strategy which would mean a major support bring corporate buybacks to be out of the market as it is no longer viable.
2. A blowout of UST 10Y Yield above 3% as soon as next week!
In the world of good news is bad news, we are expecting the UST 10Y yield to break above 3% next week which would be deemed as VERY STRONG GROWTH signal in the US, which of course we bears are very happy to sell into any bounces if it happen in equities. 10Y UST Yield closed at 2.96%, a recent high which was met with a bad weekly close for the S&P500. We expect continuation of this move next week given the amount of GOOD NEWS we had over the weekend so far, with regards to North Korea , China-US trade war, and fake news on gun fire shootings of a drone in Saudi Palace, in which looks more like an internal coup going on.
We at Thebearprowl are really excited to see how the US 10Y Yield will trade next week on the face of such GOOD NEWS! And very excited to see how US Equities trade in the week ahead. Remember the tag line. Good news is bad news, bad news is good news.
Just recall how when China threatened the ultimatum sanctions to the USA and the market dropped 3% only to close up 3%? Could we get the reverse action next week?
3. Key week for Nasdaq100. Do or die.
FANGS earnings date as below for the week.
Facebook : Close of market 25/4/18. The consensus estimate on EPS is $1.36, up 30.8%, on revenue of $11.4 billion, up 43%
Amazon : Close of market 26/4/18. The consensus estimate on EPS is $1.19, down 19.6%, on revenue of $50.16 billion, up 40.4%.
Alphabet : Close of market 23/4/18. The consensus estimate on EPS growing 20% to $9.31, with revenue rising 22.5% to $30.31 billion
We shall let price action decides if the recent correction in Tech stocks since Feb18 is merely a small correction, or something deeper is expected as pointed out in our first post that the Generals are important to the market rally. Market action this week for Apple is disappointing which has allowed the market to form a possible Head and Shoulders pattern for the Nasdaq100 index, only to have full confirmation likely within the next two weeks. A break of the 6350 levels would call for a target of 5300, given break of 200MA along side technical studies textbook target for H&S pattern.
In Summary, we call for caution given the headwinds mentioned above namely rising cost of funding for companies which will limit stock buyback actions in 2018-2019. Rising UST 10Y Yield on good news could be the trigger for the move down in equities as good news is now bad news. Tech earnings next week will allow us to have further confirmation if the market generals are indeed injured and no longer able to lead the army forward for further equity market upside.
A picture to end the week, the fearless girl whom many have not noticed, up against the charging bull of wall street.
"Fearless Girl" was commissioned by State Street Global Advisors and created by Kristen Visbal.
The statue was intended to draw attention to women in corporate leadership, but the "Charging Bull" artist wanted it moved, claiming it distorted the meaning of his work.
Good luck trading!
The Bad Bear