GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.

 

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SHAKIN’ ALL OVER: MARKETPLACE CONVERGENCE AND DIVERGENCE © Leo Haviland June 18, 2018

OVERVIEW AND CONCLUSION

Financial wizards not only offer competing opinions regarding past, current, and future trends for stock, interest rate, currency, and commodity marketplaces. Their rhetoric displays diverse viewpoints regarding alleged relationships within and between those categories. For example, within the global stock constellation, various apostles elect to compare the travels of the S+P 500 with those of the Nasdaq Composite or with an emerging marketplace stock benchmark. Alternatively, some visionaries herald their subjective insights and foresights about connections between stocks (such as the S+P 500) and interest rates (such as the United States 10 year government note), perhaps also including the US dollar and the commodities galaxy in their investigations.

Luminaries tell stories offering their cultural perspective regarding apparent convergence and divergence (lead/lag) relationships within and between marketplace domains. Viewpoints regarding convergence and divergence encompass not only price direction (trend), but also the timing (start and end date; duration) of a given move as well as the distance it travelled. In any case, these links (associations; patterns) can alter, sometimes substantially and occasionally permanently. Marketplace history, including that related to convergence and divergence, is not marketplace destiny, whether entirely or even partly.

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History reveals that the S+P 500 and emerging marketplace stocks “in general” (MSCI Emerging Stock Markets Index, from Morgan Stanley; “MXEF”) often have had very important trend changes in the same direction “around” the same time.

After establishing important bottoms together in first quarter 2016, the key American stock indices and those of other important advanced nations and the “overall” emerging stock marketplace traded closely together from the directional and marketplace timing perspective. Though the bull moves since first quarter 2016 in these assorted domains did not all voyage the same distance, all were very substantial. Their rallies since around the time of the November 2016 United States Presidential election were impressive. Both emerging marketplace equities and the S+P 500 established important peaks in first quarter 2018 (MXEF 1279 on 1/29/18; S+P 500 2873 on 1/26/18).

Yet whereas since its first quarter 2018 summit prices for the emerging stock marketplace arena have eroded significantly and currently rest at their calendar 2018 lows, the S+P 500 has retraced much of its dive and now (6/15/18 close 2780; stock price data in this essay is through 6/15/18) stands only slightly over three percent from its 1Q18 top. This divergence, though not massive, is noteworthy. A similar but more extreme divergence between these stock benchmarks existed from spring 2011 (and note particularly since around second half 2014) through about May 2015. The S+P 500 kept going up and achieved new highs over its spring 2011 one, but the MXEF failed to do so.

After spring 2015, convergence developed, with a bear trend in the S+P 500 accompanying the existing downhill one in the emerging marketplace stock group. An important factor assisting this was the decisive climb in the broad real trade-weighted United States dollar (“TWD”) above its critical resistance around 96.6. A similar convergence is likely to occur in the present MXEF and S+P 500 marketplace relationship, with the significant divergence disappearing and both equity realms falling “together”.

US corporate earnings indeed have been quite strong, with share buybacks and mergers and acquisitions robust. Nevertheless, one bearish factor for stocks in the current landscape is the broad real trade-weighted dollar’s recent advance over the 96.2/96.6 barrier (compare 2015); also recall the TWD rally beginning in spring 2008 during the 2007-09 global economic disaster). The ascending US yield trend (which began in July 2016, accelerating in 1Q18) has encouraged the TWD’s modest rally in the past few months. Trade war talk and potential tariffs probably have assisted the TWD’s appreciation. The US is a net importer nation; some exporters (which include many developing nations) may depreciate their currency to maintain market share within the US.

Another bearish sign for both advanced nation and emerging marketplace stocks is the persistent climb in US Treasury yields. Rising global yields alongside a strengthening dollar is especially painful to emerging marketplace countries and thus their stock marketplaces. Many developing nations, including their corporations, have dollar-denominated debt. And underscore in this context another point: for America over the past century, sustained rising yields generally have led to American stock marketplace declines. Given the Federal Reserve Board’s ongoing tightening policy (and its normalizing balance sheet, as well as probable willingness to allow some overshooting of its two percent inflation target), growing substantial US federal deficits (aided by tax “reform” legislation enacted in December 2017), substantial US household credit demand, a low unemployment rate, and other factors, US government yields probably will tend to keep rising over the long run. The growing mountain of US public debt, including as a percentage of GDP, also tends to push up interest rates.

A confirming sign for equity feebleness in both the S+P 500 and the MXEF likely will be weakness in commodities prices. Commodities often have peaked (bottomed) around the same time as a crucial top (bottom) in important advanced nation or emerging marketplace stocks. However, there have sometimes been lags. Recall that in during the worldwide financial crisis following the glorious Goldilocks Era, commodities “in general” peaked after the S+P 500 and emerging marketplace stocks. The broad Goldman Sachs Commodity Index (“GSCI”) has declined since 5/22/18’s 498 high.

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Shakin' All Over- Marketplace Convergence and Divergence (6-18-18)

COMMODITY CURRENCIES IN CONTEXT: A FINANCIAL WARNING SIGN © Leo Haviland May 1, 2018

“All poker is a form of social Darwinism: the fit survive, the weak go broke.” A. Alvarez, “The Biggest Game in Town”

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OVERVIEW AND CONCLUSION

The Bank for International Settlements provides broad real effective exchange rates (“EER”) for numerous currencies around the globe. Within the BIS statistics are several nations who are important exporters of widely-traded commodities such as petroleum, base and precious metals, and agricultural products such as soybeans. Concentrating on and comparing the broad real effective exchange rates of eight freely-traded currencies widely labeled as “commodity currencies” offers insight into assorted interrelated financial marketplace relationships. The overall patterns of this array of assorted export-related commodity currencies often has intertwined in various ways with very significant trends in broad commodity indices such as the S&P Goldman Sachs Commodity Index (“GSCI”) and the Bloomberg Commodity Index (“BCI”), the broad real trade-weighted United States dollar (“TWD”), emerging marketplace stocks in general (as well as the S+P 500), and key interest rate benchmarks such as the 10 year US Treasury note.

In assessing and interpreting the role of and implications indicated by the commodity currency platoon in financial battlefields, marketplace guides should highlight several preliminary considerations. The various commodity currencies (“CC”) do not all move at precisely the same time or travel the same percentage distance in a given direction. Although they generally move roughly together within an overall major trend for the group, an individual member may venture in a different direction for quite some time. Although the path in recent months of the various CCs “together” generally has been sideways, their individual movements have not been identical.

Of course the various commodity currency countries are not all alike. So a given guru can tell somewhat different stories about each of them and their currency. Not all CC nations are equally important within the international trade arena. The various domains do not rely to the same extent on commodities within their export packages. And not all are reliant on a given commodity sector (such as petroleum) as part of their commodity output. Some CC nations produce notable amounts of manufactured goods. In addition, some countries probably are more vulnerable to currency and trade wars than others.

Moreover, the intertwined relationships between currencies (whether the CC EERs or others such as the broad real trade-weighted United States dollar), commodities “in general”, stock marketplaces (advanced nation signposts such as the S+P 500; the emerging marketplace field in general), and interest rates can and do change. Relationships between CC EERs and the broad real trade-weighted dollar (“TWD”) can shift. The TWD’s intertwining and relationship to interest rate, equity, and commodities in general is complex. In addition, although subjective perspectives identify apparent convergence and divergence (lead/lag) relationships between financial territories, these connections (links, associations) can alter, sometimes substantially. Marketplace history is not marketplace destiny, whether entirely or even partly.

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Commodities “in general” surpassed their first quarter 2017 peaks in first quarter 2018 (and April 2018), rapidly climbing from a notable mid-year 2017 trough. The majority of commodity currencies established an EER top in (or around) 1Q17. In contrast to commodities in general, the effective exchange rates of the various commodity currency club members either have not exceeded that top established in (around) 1Q17, or have not done so by much. In addition, the CC group’s EERs generally did not climb much, if at all, from around mid-year 2017. This CC EER pattern (some divergence from commodities in general) warns that a significant top in commodities  probably is near. In the past, highs for the commodity currency EERs linked to highs for commodities in general.

Relevant to this marketplace viewpoint regarding the commodity currency EERs and commodities “in general” is the upward trend in US Treasury note yields. Recall not only the major bottom in the UST 10 year note around 1.32 percent on 7/6/16, but especially underline for the CC (and global stock marketplaces) the yield climb from its 9/8/17 interim trough at just over two percent. The Federal Reserve Board has been raising the Federal Funds rate and gradually reducing the size of its bloated balance sheet. The UST 10 year note broke out in first quarter 2018 above critical resistance at 2.65pc; the UST 10 year  recently bordered 1/2/14’s 3.05pc barrier (3.03pc on 4/25/18; the two year UST note also has climbed, reaching 2.50pc on 4/25/18). Also supporting this outlook for commodities is the 1Q18 peak in the S+P 500 (1/26/18 at 2873) and the MSCI Emerging Stock Markets Index (from Morgan Stanley; “MXEF”; 1/29/18 at 1279).

Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. These include buying commodities as an “asset class”. What happens to commodities when key central banks begin to end their beloved yield repression schemes, or hint that they will do so?

Marketplace history indeed shows that sometimes there has been divergence between commodities “in general” and stock benchmarks such as the S+P 500 for a while. Recall the 2007-09 global economic disaster era. The S+P 500 peaked 10/11/07 at 1576 (MXEF summit 11/1/07 at 1345), prior to the broad GSCI’s pinnacle in July 2008 (7/3/08 at 894). Yet recall that the July 2008 GSCI peak occurred close in time to the noteworthy S+P 500 interim high on 5/19/08 at 1440, as well as the lower S+P 500 tops of 8/11/08 (1313) and 9/19/08 (1265). And note the timing linkage between the broad GSCI and S+P 500 in the past couple of years. Not only did they make major lows around the same time in first quarter 2016 (broad GSCI at 268 on 1/20/16; S+P 500 on 1/20/16 at 1812 and 2/11/16 at 1810). They both accelerated upward in their bull moves around the same time in mid-year 2017; the GSCI low was 351 on 6/21/17, with that in the S+P 500 6/29/17’s 2406 (8/21/17 at 2417). The broad GSCI slumped from its initial high at 466 on 1/25/18, which linked to the S+P 500’s high on 1/26/18; although the GSCI since has hopped over its 1Q18 interim top, it thus far has not done so by much (480 on 4/19/18).

Thus the failure of the EERs for the CC group as a whole to advance much over the past year and especially since mid-year 2017 (with no decisive overall new highs for the group in general in 1Q18) probably has implications for both commodity and equity trends.

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Commodity Currencies in Context- a Financial Warning Sign (5-1-18)

THE CURTAIN RISES: 2016 MARKETPLACE THEATERS © Leo Haviland January 4, 2016

Shakespeare proclaims in “As You Like It” (Act II, Scene VII):

“All the world’s a stage,

And all the men and women merely players”.

THE 2016 WORLDWIDE ECONOMIC STAGE

As the 2016 international economic (and political) drama commences, the worldwide economy not only is sluggish, but also feebler than most forecasters assert. International real GDP, as well as that in the United States, has a notable chance of slowing down further than many expect (the International Monetary Fund predicts real global output will increase 3.6 percent in calendar 2016; “World Economic Outlook”, Chapter 1, Table 1.1).

The ability of the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, China’s central bank, and their friends to engineer their versions of desirable outcomes via highly accommodative policies has diminished. Beloved schemes such as quantitative easing (money printing) and yield repression and related rhetoric are becoming less influential. Ongoing significant political divisions and conflicts (America’s troubling carnival represents only one example) likely will make it challenging for political leaders to significantly promote substantial (adequate) growth.

The failure of longer term US government yields such as the UST 10 year note to rise substantially despite the Fed’s recent modest boost in the Federal Funds rate represents a noteworthy warning sign regarding American and global financial prospects. Note also very low sovereign yields in much of the Eurozone (picture Germany); Japanese government rates remain near the ground floor. However, yields of less creditworthy debt instruments, whether sovereign or corporate, probably will continue to climb in 2016, another ominous indication.

For the near term at least, the broad real trade-weighted US dollar probably will remain strong. Emerging marketplace equities and commodities “in general” likely will persist in bear trends. What does the rally of the dollar above its late August/September 2015 heights signal? What does the collapse of benchmark commodity indices such as the broad GSCI beneath their late August 2015 lows portend? These warn not only of worldwide economic weakness, but also of further declines in the S+P 500. Note that emerging marketplace stocks hover fairly closely to their 2015 depths. The S+P 500 probably will remain in a sideways to bearish trend.

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The Curtain Rises- 2016 Marketplace Theaters (1-4-16)