Week In Review – October 12


  • Ugly week for equities
  • Russell 2000 led the U.S. indices down, falling over 5 percent
  • Shanghai down over 7 percent,  some of which was catch up after a week close
  • The 10-year yield rise, which triggered the equity correction,  stabilized peaking at 3.25 percent
  • U.S. credit starting to crack with lower tier spreads blowing out.  As we said last week,  watch this space!
  • EM FX a bit stronger led by Turkey with release of America pastor
  • Crude oil gave 4 percent back
  • Lumber =  Timber!  Now down almost 50 percent from its spring peak

Commentary:  Equities cracked as bonds cracked.  Watch the levels in following table on the S&P500.  Closes below the key .50 Fibo at 2736 and then 2688 makes it a high probability we see the February low.  Much will depend on the U.S. bond market.  Tuesday’s release of the TIC data, measuring foreign flows into the U.S. Treasury market are now exceptionally important to the stability of interest rates.

Angels Merkel’s coalition party took a beating in the Bavarian elections calling into question the stability of the German coalition government.  Unclear of impact on euro, but we bet it’s not a positive.  All eyes on Frankfurt elections in two weeks.  Looking for bounces to get shorty.





Watch Europe on back of Merkel’s trouncing in the Bavarian elections


Economic gains continue to accrue to capital over labor

Week_Chart_3_Economy and Wages

Saudi stocks hammered over tensions of the Washington Post’s journalist’s suspected murder

Week_Chart_2_Saudi Stocks







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Auf Wiedersehen, Angela?

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Sector ETF Performance – October 12





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Global Risk Monitor – October 12



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Italians are all talking about the bond spread – FT

Lo spread’ – the yield gap between Italian and German 10-year bonds – is the hot topic of conversation in Rome after the populist coalition government promised a spending splurge

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Traders Get Caught…..

What is else in new?

Slice through the 200-day like a hot knife through butter yesterday only to close above it today.  Still would not touch equities here for my than a flip,  and looking to get shorty at higher prices.



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Price Action In The S&P & Its 200-day MA

That was easy.

Only second close below the 200-day (2765ish) for the S&P since January 2016.   The 200-day has been steel support for the S&P500, and a trampoline for reversal rallies over the past few years.   Not today.

Is this a bear trap?  Don’t think so, has more downside, in our opinion.  Stops at 2770.

Key earnings out of JP MO tomorrow.

Bonds behaving badly as expected.

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Browbeating the Fed 2.0

As the market melt and President Trump ramps up his rhetoric on Fed rate hikes, we thought you’d be interested in our July post.

By the way,  the geopolitics in the Taiwan strait are growing much hotter since we wrote.  We took a lot of pushback from this post (see last few paragraphs).   Here is the latest

Taipei (AFP) – Taiwan’s President Tsai Ing-wen on Wednesday accused China of “seriously challenging” peace and stability, describing the island she leads as being on the frontline of tensions in the Pacific.

Her comments come as Beijing pursues a multi-pronged attack on any claims to sovereignty by self-ruled democratic Taiwan, which it sees as part of its territory to be reunified, by force if necessary.  – AFP, October 10th

Is Trump Starting To Lean On The Fed Or Setting It Up?

President Trump said in an interview with CNBC’s Joe Kernan this morning he “does not agree”, is not “thrilled” or “happy” with the FOMC’s interest rate hikes.  The full interview and transcripts will be available tomorrow.

Jul19_Trump Interview

Click here for excerpt of interview

You Heard It Here First

Presidents never, or rarely comment on monetary policy or currency market moves. for that matter,  x/ the hackneyed meme “a strong dollar is the best interest of the United States.”

President Trump hit them all in this interview today, from the Fed to the Euro and Chinese RMB (“dropping like a rock”).  It doesn’t surprise us.

Recall our March 21st post, The Biggest Risk At The Fed.

But this doesn’t concern us as much as the Fed’s independence.

“Just let it rip”

That is we are worried more about the freedom from White House pressure and interference in conducting monetary policy than getting a few bps wrong on the Fed Funds rate.   This is especially true and relevant given the strongman tendencies and  lack of respect for institutional norms of the current president.

Here is Larry Kudlow, the president’s new chief economic adviser:

“Just let it rip, for heaven’s sake,” Kudlow said of economic growth in the U.S., during a more than hour-long interview Wednesday on CNBC. “The market’s going to take care of itself. The whole story’s going to take care of itself. The Fed’s going to do what it has to do, but I hope they don’t overdo it.”  – CNN
– Global Macro Monitor,  March 21, 2018

We were assured by Fed insiders shortly after that post in March Chairman Jerome Powell was tough and we should not underestimate his independence.   He has thus far proven to be an extraordinarily competent Fed leader.

Moreover, the president seems to have appointed very competent and independent Board governors to fill the many vacancies on the FRB.

Nothing Here, Move On

Other than committing another faux pas by publicly criticizing the Fed — and it really wasn’t that critical — the president’s comments,  taken in isolation,  were relatively benign and does not pose a threat to central bank independence, in our opinion.

But the totality and cumulative mistakes of  amateur hour at the White House, from foreign to domestic economic policy, are slowly chipping away at the world’s confidence in the management of America, Inc..

What we fear most is the loss of confidence in the world reserve currency status of he U.S. dollar, which is slowly eroding.   There doesn’t currently seem to be a viable replacement, however.  We do live in a nonlinear world,  where technological advancements can rapidly change and turn sectors upside down overnight, so that could change in a heartbeat,

Just look at the rise of crypto and mobile payments in the past decade?

Who is to say that a replacement for the dollar won’t come along in the next few years?  That would be a huge game changer and could render the U.S.economy to the dustbin of highly indebted countries, with large deficits, and irresponsible monetary policies.  And you know who they are.

Is Trump Setting Up The Fed As The Fall Guy?

CNBC’s Steve Liesman raises an interesting question: is Trump setting up the Fed to take the fall for his trade policies gone bad?   Farmers are really starting to feel the pain.

As Dale grain and beef cattle farmer Dennis Whitsitt watches his crops grow in the fields, he also watches grain prices tumble as tariffs between the U.S. and several other countries take effect.

The Trump administration began talking about imposing tariffs on Chinese imports in January, starting what has come to be called a trade war. Trump’s threats led China to threaten retaliatory tariffs on U.S. goods, including soybeans and pork. Both countries enacted the threatened tariffs on July 6. The administration also imposed tariffs on goods from the European Union, Canada and Mexico, leading those countries to impose retaliatory tariffs as well. Those tariffs also included farm goods as foreign leaders looked to hurt areas that voted for Trump. In Whitsitt’s opinion, the tariffs have hit their mark, as far as farmers go.

“It doesn’t seem like a good strategy,” Whitsitt said of the trade war.
— The Herald,  Jasper, IN

What Worries Us Most About The Interview

This is what tweaked us most about the president remarks,

Now I am just saying the same things what I would have said as a private citizen. So somebody would say oh maybe you shouldn’t say that as a president. I couldn’t care less what they say. Because my views haven’t changed.   – President Trump

“I couldn’t care less” — Are you frickin’ kidding me?

As we posted  last night, the president’s not even ambiguous (double negative) comments on coming to the defense of a NATO country, coupled with the U.S. public, which some could read, acquiescence to the Russian annexation of Crimea only increases the risks that China moves on Taiwan.

The U.S. would then have to decide if it willing to “send its boys” to defend Taiwan and enter World War III.

Serious business, folks.

By the way,  this just in,


As Washington pundits and government officials debate President Trump’s meeting with Russian President Vladimir Putin in Helsinki, China is busy sending a strategic message to the United States with large-scale war games near Taiwan.

China on Wednesday kicked off live-fire drills in the East China Sea north of Taiwan in an area simulating the size of the island state — a not-so-subtle message to the country Beijing regards as a breakaway province.

The military maneuvers at sea also will be held not too far to the west of the Japanese island of Okinawa, home to U.S. military forces.

The six-day war games were announced Monday in a sea closure zone that warned all vessels to stay clear of the area, where Chinese ships are firing missiles and other weaponry.

The sea closure zone covers an area off the coast of Zhoushan, south of Shanghai, to Wenzhou about 200 miles to the south. The Communist Party-affiliated newspaper Global Times noted the exercise zone’s “similar size to the island of Taiwan.”

The exercises are designed to warn Taiwan, Chinese military expert Song Zhongping, told the newspaper. “The drill’s main objective is to send a serious warning to Taiwan separatists,” Mr. Song said.

According to another Chinese military expert quoted by Global Times, the East China Sea is viewed by the Chinese military as the main battle zone if war breaks out.

The expert, who was not named, said this week’s drills are larger than in the past and require more troops and weapons. The maneuvers will test the Chinese military’s combat capabilities, tactics and training methods and its new weapons and hardware.

“The [People’s Liberation Army] air force and navy have been frequently conducting island encirclement exercises,” Mr. Song said. “The drill this time will add up and form a military deterrence of high pressure against the Taiwan separatists.”

According to Mr. Song, the war games will involve joint military operations in a bid to simulate real combat. —  Washington Times, July 18th

Stay tuned!


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S&P500 Flirting With Key Support

The S&P500 moved through its 200-day moving average this morning and has bounced almost 20 points back above the low for a day back through the 200-day .   Since early 2016, the 200-day has acted as steel support for stocks, and a trampoline to launch strong reversal rallies.

We count only one close below the 200-day since early 2016, in early April.

Charlie B. recently noted the S&P500 ETF has closed 571 straight days above its 200-day moving average, an all-time record.





The level to watch today is 2765.91.   



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Tail Event Day: -3.29% S&P500 and +1.7 bps 10-year Yield

Something is rotten in the U.S. bond market, which is irritating the stock market, to say, the very least.

Today’s 3.29 percent flop in the S&P500, coupled with a 1.7 bps rise in the 10-year yield, is very rare, and has only happened this century in the midst of a major stock market crash.

The S&P500 has declined 3 percent or more in just 1.42 percent (68) of the 4,781 trading days since October 1999, and the 10-yield has risen more than 1.5 bps during those 3 percent + drops in just 0.17 percent of the (8) trading days since October 1999.

No flight to “quality” as stocks have tanked, even with the record short in 10-year futures at an all-time high.  Bonds should have rocked on today’s 800 point decline in Dow Jones  Come on,  man!

Our Treasury market analysis seems to be playing out.   We suggest you read it.




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