High On Proliferating Optimism The Bulls Say No Worries To Eurasia’s Nuclear Arms Push: The Action For May 7, 2024
Putin’s use of the hoary Russian nuclear threat is having no impact whatsoever on financial markets despite its clear meaning in the proliferation of WMDs. Putin is signaling that any Ukrainian attack on Russia will cascade into an even worse horrorshow but the deeper impact is on the legitimization of mass warfare in a deglobalizing world. Where once the idea of a global economic wave lifting all boats kept war in the background now it’s front and center and the next step can only be deadlier war or regime change. The US has no strategy for changing regimes in Moscow, Pyongyang and Tehran, and so the risks of cascading wars is growing. And this goes against the notion of high valuations, so financial markets are effectively ignoring what is too painful to contemplate.
Instead it’s the prospect of liquidity from the Federal Reserve and lower inflation that’s feeding the imagination of investors. The S&P 500 likely rises over the near term, but it’s unlikely liquidity will materialize since the Fed is still committed to QT, and increasingly likely that geopolitical events take center stage as today’s newsflow indicates.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Shanghai Composite Technicals: Chinese equities are trading well and that bodes well for the global economy.
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.
Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.
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.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.
Based on the action yesterday and overnight there are some risks the bulls need to climb over, including:
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.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
Yesterday I added to my position in the inverse levered ETF SPXU, consequently my current positions include 3M (MMM and its spinoff SOLV), Pfizer (PFE), and a larger but still moderate position in SPXU, which nets out to a moderate short position in equities.