Democratic Outcomes Spook The Markets But Count On The Bulls To Forget Their Political Troubles And Take Equities Higher: The Action For June 4, 2024
Inconvenient elections are weighing on markets this morning with emerging market currencies taking a dive on fears that the status quo from Mexico to India may change for the worst. Until now the status quo has been a source of a joy to the bulls and for reasons that verged on the irrational. But now that the Left is making gains in EM nations while the far right looms in Europe it’s possible a reality check sets in and enlivens the bears. What had previously been seen as neutral far left policies in Mexico is in reality a populist revolt against competition that likely exacerbates border tensions. And what was seen as a pro-busines and infrastructure-mad right wing in India is in reality a nasty chauvinistic surge that likely culminates in war against someone somewhere, for which Indians have thankfully shown some dissatisfaction with. Both nations share the lack of national identity, resulting in strong-arming leaders achieving popularity regardless of the morality of their policies. Geopolitics is usually negative for the markets but at present the problem is that it’s likely to get much worse.
The bears have control for the moment but several indicators reveal confidence in corporate earnings and the macro environment, and likely pull the market higher by the close. These include:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish for equities.
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.
Developed Market FOREX / $US: The dollar is getting weaker against most major currencies (€, ¥ and Renmimbi) and that’s good for global growth.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Based on the action yesterday and overnight there are some risks the bulls need to climb over, including:
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 $.
Zinc Prices: Few commodities are as broadly important as zinc, and falling prices for zinc signal that global demand is weak, which is usually bad for equities.
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 Eurasia 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.
My current positions include 3M (MMM and its spinoff SOLV), Pfizer (PFE), a moderate position in UPRO and a smaller position in SPXU, which nets out to a modestly bullish position in equities.