Grim Reality And Fanciful Hopes Mar The Middle East While The Same Context Buoys Global Wall Street: The Action For January 10, 2024
A story about US-Saudi pressure on Israel to resurrect the two-state solution seems absurdly hopeful in light of the adjacent article depicting the pure hell of the war in Gaza. And while politics often seems absurdly hopeful the same is generally not true of Wal Street, making the current upswing all the more unseemly. The S&P 500 likely consolidates in front of tomorrow’s CPI print, and if that report shows any hint of good news the market likely rallies to new highs.
The market is rallying this morning but the bears likely gain control later as several indicators reveal pessimism on corporate earnings and the macro environment, and this combined with anticipation of tomorrow’s inflation print lead to profit-taking by the close. These bearish factors include:
Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
Geopolitical Issues: Developments around the South China Sea, the Middle East and Ukraine are a clear negative for equities.
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.
But as tomorrow’s print will determine market direction, the bulls can easily retake control at 8:30am tomorrow as a few bullish factors are in their favor, including:
High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving economy.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and a corresponding crisis for the Euro are muted, which is critical for European stability and is good for global growth.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
My current positions reflect my near-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a moderate position in UPRO that is partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.