Tuesday, March 7, 2023

Morning Note: Key Macro Highlights

Here I'll once again make a morning message out of my key highlights from our latest weekly macro dive.

I color-coded each based on how I see its signal, either with regard to overall general conditions, or, in the case of data related to a specific country or region, with regard to what it says specifically about a particular item... I also parenthetically defined the acronyms.

The on-balance message from the color-coding will give you a feel for why we remain guarded over present general conditions.


Key points from last week’s macro study:

  1. PWA Index (45 inputs) gained 7 points, to -22 (i.e., recession signal abated)

    1. Global PMI rose to 52.1

    2. Baltic Dry Index rose another 300 pts, to 1,145

  2. Our Fear/Greed Barometer dropped 37.5 points, to 12.5… Denoting increased complacency… Although AAII (American Association of Individual Investors) bullish reading dropped markedly, and the Investor Intelligence investment advisor bull/bear spread is down to 9.6, COTs (Commitment of Traders) for SPX and NDQ100 futures are net short, and QQQ short interest is very high – denoting rising fear by those metrics… Complacency signals show up in the VIX (SP500 volatility index), in SPY (SP500 tracking ETF) short interest and in the equity put/call ratio.

  3. Our Financial Stress Index declined marginally, to -36.36 (denoting net [elevated] stress)… CDS (cost of debt default insurance) spreads are really calming down of late.

  4. TGA (treasury general account) dropping markedly of late, down ~200 billion (to 381b) since Feb 1.

  5. FX (foreign exchange) Volatility down notably of late, to 9.80… peaked at 13 last Sept.

  6. The MOVE Index (tracks implied volatility in treasury options) popped 5 more points to 122.52.

  7. The Treasury Liquidity Index continues to trend lower, although remains historically elevated.

  8. Fed Balance Sheet continues to roll over.

  9. Fed Funds Futures pricing in 25% chance of 50 bp hike March meeting.

  10. 10-year sovereign bond yields above 3-month average across the globe.

  11. Brazil, Mexico, Italy, Australia and New Zealand 10-yr yields at a premium above US.

  12. US ETFs saw another week of net outflow (big time last week), followed by China and Australia.

  13. Huge outflow from SPY, followed by IWM (small cap stocks) and HYG (junk bonds).

  14. Highest US ETF net inflows to XLE (energy stocks), OMFL (US large cap stocks) and AGG (US investment grade bonds).

  15. Hong Kong, Europe and Canada saw the largest net inflows.

  16. Huge net short interest in 10-year treasury futures.

  17. Net short interest in sp500 futures down slightly on the week, but still notably elevated.

  18. Net short interest in dow futures down for 3rd straight week.

  19. Nasdaq futures less net short for 2nd straight week, but still notably elevated.

  20. Russell 2000 (US small cap stocks) futures net short interest jumped by 12k contracts.

  21. EAFE (developed non-US equity markets) futures net short declined by 9k contracts, but still elevated (first decline in 5 weeks)

  22. EM (emerging markets) futures net short down for 3rd straight week… Now barely net short.

  23. Gold futures net long decreased for the first time in 10 weeks.

  24. Silver futures net long halved on the week.

  25. Copper futures net long plunged, only slightly net long at this point.

  26. Coffee futures specs flipped from net short (since last November) to net long.

  27. Lumber futures spiked to notably net long, after being net short since last July.

  28. Euro futures specs hugely net long.

  29. Big jump in Real (Brazil’s currency) net long exposure on the week

  30. XME (base metals miners) up 18.61% YTD… Largely exposed to recession risk right here!

  31. EWW (Mexico equities) is up 22% YTD… We’re bullish on Mexico, but looks overbought right here, with bearish momentum divergences.

  32. Industrial and materials equities presently overbought… Staples, healthcare and utilities oversold.

  33. Yen technicals lean bullish... Futures speculators net short positioning jumped… squeeze risk elevated on any BOJ (Bank of Japan) surprise.

If you have a question regarding any of these highlights and/or their color-coding, feel free to shoot me an email or leave a comment below, I'll be sure to follow up with a description/explanation.

Asian stocks were mostly red overnight, with 11 of the markets we track closing lower.

Same for Europe so far this morning, with 13 of the 19 bourses we follow trading down as I type.

US equity averages -- responding to J. Powell's prepared remarks ahead of his appearance in Congress this morning -- are down to start the session: Dow by 156 points (0.47%), SP500 down 0.68%, SP500 Equal Weight down 0.70%, Nasdaq 100 down 0.89%, Nasdaq Comp down 0.72%, Russell 2000 down 0.61%.

The VIX sits at 19.22 up 3.28%.

Oil futures are down 1.32%, gold's down 1.18%, silver's down 2.79%, copper futures are down 2.48% and the ag complex (DBA) is down 0.40%.

The 10-year treasury is up (yield down) and the dollar is up a big 0.82%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 5 -- VNM (Vietnam equities), AT&T, TLT (long-term treasuries), ITA (defense stocks) and XLP (consumer staples stocks) -- are in the green so far this morning. The losers are being led lower by MP Materials, SLV (silver), Albemarle, URNM (uranium miners) and DBB (base metals futures).

While discussing markets with a friend last evening, he recalled the following quote that resonates with how we think about the investing process... He didn't recall the source:
"The market does not determine your success, it determines your strategy."   

In this context, we're talking "the marketplace." I.e., general conditions.

Have a great day!

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