It’s been a while since I posted a market update. So, without delay here is your global macro setup as we approach mid-February.
To summarize, we have a bit of a tricky setup at the moment. First off, global Central Banks are trying to pivot to a tightening monetary policy without upsetting the apple cart. In the face of raging inflation, our monetary master’s appear in no hurry to raise rates. In fact, the snail pace is leaving many seasoned traders dialing back risk until a clearer picture emerges.
It might be wise for us all to step back and assess our equity risk and perhaps take some defensive action.
US Dollar – DXY
Clearly, there is no shortage of demand for US dollars. US capital markets remain the deepest and most liquid in the world. Indeed, all the liquidity created by quantitative easing needs to find a home. And the best looking house on the block is US equities.
US Bond Market – US 10-year Treasury Note (Yield)
US rates are on the move higher as the market prepares for rate hikes this March. However, looking back to pre-pandemic levels reveals an interesting dichotomy. Evidently, rates and inflation are out of whack. Today we’re dealing with raging inflation and artificially surprised interest rates. What’s more, if you look back to pre-pandemic levels, during 2018 CPI is ~2% and the 10-year yield is ~3.2%. Today CPI is >7% and the 10-year yield is ~2%. Houston we have a problem!
Without a doubt, it’s hard to keep a straight face when explaining yield movements since inflation started “gettin jiggy wit it” this past summer.
Just to be clear ,global Central Banks are WAY behind the inflation curve!
US Stocks – SPY ETF
Meanwhile, stocks continue to march higher even in the face of heightened of volatility. Equity investor’s appear to have not received the message, “rates are going higher.” Or, they have and just don’t care. One thing stands out on the chart, “buy the dip” is still a strategy that works! At least for now.
Conclusion
Clearly, the equity bull market is still in tact, but a few cracks have appeared. Sooner or later the bull market will end. But, until rates rise to a level closely resembling CPI (7%), investor’s only shot to beat inflation on real terms is to tough it out in the stock market.
One final note, the NASDAQ 100 tech heavy index has now failed twice to breakout above it’s 200 day moving average. This is a bearish technical setup!
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What a fear trade looks like –>
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