Delivering A Great Brexit (Daily Close)
US Stocks ( Equity sector performance ) closed largely unchanged and nothing of note happened yesterday pricewise although some indicators are suggesting extreme confusion (unless it is me in need of a disconnect more than a recess).
Helping sentiment a little yesterday was Berkshire proceeding to the top of the day performance with a 5% gain (+7.5% MTD) which also propelled the share price to the top of our Z-score report after W. Buffet lifted the cap on share buybacks of his own shares. This was part of the fix for this year’s underperformance of Berkshire which went from -3% YTD to +1.9% YTD. Financials were strong yesterday as well.
Three things are puzzling and unsettling us; the relentless rally in Bunds, happening coincidentally with European stocks pushing higher; the fact that the CBOT SKEW (so called crash) index ( see confidometer) is sending a clear warning signal (at about 155, this index is in clear danger zone); the rallying CHF which looks unsettled and finally some tech momentum waning coupled to complacent risk reversals on an historical basis in the option market.
The market is behaving as if it was afraid of something that never happens...which might well be a recession, judging from the bond signaling which owns the best PHD in economics there is and which covers up for now the noise created by some investors parting ways with US treasuries for political reasons only.
GBP weakened further after Boris Johnson looked ever readier for a Heseltine moment. The rally in EURBP remained modest and tame however (with the Summer recess coming) but contrasted with broad based EUR weakness. EURGBP also occupied one of the top spots of our Z-score report (trading 2.4 Std above 20dMa) … A more severe correction remains possible for GBP in case T. May is toppled. Yesterday the UK inflation number came in a sufficiently tame as to not necessitate a rate hike in August.
EM was mixed and dull (slightly lower) although the Chinese picture remained grim with Chinese stocks making new lows for this move and CNH trading at a -0.5% discount to CNY, suggesting selling pressures.
Gold started the day sliding down the black soap plank but recovered to close unchanged.
The saga of a putatively treasonous Trump looking too friendly to V. Putin in Helsinki continued yesterday. Whatever the Russians do, they will always have to be the US enemy, not least because that is the way it should be. Treason, un-American, unpatriotic etc..are three adjectives used ad nauseam by people of bad faith all across the US. If you are clueless, rigid, untraveled and you do not agree with someone, call him that and chances are you will look and feel as a better and more patriotic American.... Sure enough, Russia meddled in the 2016 election. V. Putin even candidly repeated earlier this week, that he supported D. Trump. Sowhat? A Republican congressman on Bloomberg TV a Chicago University professor on CNBC a few days earlier, made that point very clear that the US is indeed meddling with politics all the time and everywhere and less and less for the pretense of conveying peace and promoting democracy.
We should only ask A. Merkel and T. May for the latest such blatant occurrence .... or better the former democratically elected Ukrainian President who was toppled before Russia decided to annex Crimea, causing the aftershock that we know.
Yesterday brought the news of Russia “dumping” its stock of US treasuries in a couple months’ time. That is a timely warning about where unilateralism coupled to a blind and bullying sanction regime will lead the US over time. Perhaps the time has indeed come for the US to become less dependent on the kindness of strangers. Spend less, save more and talk nicely to your international creditors is a message that D. Trump’s style and electoral promises make impossible to convey.
What is fueling the USD for now are two things in our view; the leading US tech sector allowing a narrow number of US stocks to lead and trounce everything else carrying a ticker; tightening liquidity conditions coupled to higher relative short-term interest rates sustaining demand for US debt (also on a swapped currency hedged basis). Take these two or three considerations out and others will likely take precedence, possibly redrawing the financial landscape.
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