Hell Week

"No stop signs, speed limit
Nobody's gonna slow me down
Like a wheel, gonna spin it
Nobody's gonna mess me around
Hey Satan, paid my dues
Playing in a rocking band
Hey mama, look at me
I'm on my way to the promised land"

I predict a half point rate cut from the Fed, just not from this level. Gamblers must traverse the valley of ignorance and arrogance to arrive at their free money promised land, which they've been front-running for seven months straight. The pre-meeting cone of Fed silence has begun...

While oblivious U.S. gamblers are super lubed ahead of the Fed, the global noose has tightened inextricably. The delusional theory of U.S. "decoupling" is ubiquitous.

"We're decoupled. From reality"
"There is no alternative"

The level of risk and complacency right now cannot be explained in any rational terms. Not only is the UK mired in an escalating conflict with Iran in the Persian Gulf, but the Conservative Party is set to pick their new leadership candidate on Monday. The British pound is at a 27 month low threatening the all time lows from post-Brexit. Ahead of the vote, the Party is stacking itself with pro-Brexit delegates, making the likelihood of a hard Brexit more and more likely.

"Morgan Stanley said the pound has come under “intense selling pressure” since Theresa May announced last month that she will step down"

Meanwhile, a quarter of the S&P 500 reports earnings in the week ahead, with key reports from Google and Amazon among other big names. 

But the real action will be in semiconductors which have had a massive short-covering rally off of the May lows. These, along with massively overbought software stocks are the keys to the Tech bubble:

"First the global slowdown clobbered them at the end of last year, then the China trade war intensifying clobbered them again in May, then the Huawei ban, then Japan’s export restrictions against South Korea."

Wall Street has been cutting estimates like mad. Pre-tax profits for semiconductors for just the second quarter is expected to contract from 36% to 29.3% year over year, a 20% reduction"

The ECB meets on Thursday this week, but well-conditioned gamblers have been front-running this key meeting, as yields have collapsed over the last three months. Setting the stage for a spike in yields deja vu of July 2016. Which will monkey hammer global bond markets. And "low volatility" bond proxies.

“People have been trading on the assumption of more QE before year-end and maybe jumping a few steps ahead”


Maybe

U.S. capital markets have been the prime beneficiary of global central bank money printing, driven ironically by Fed policy divergence. Something Trump is no way capable of understanding. He complains constantly that U.S. interest rates are too high, but U.S. stocks have outperformed the rest of the world since 2009 by a huge margin. 

In particular, the Yen carry trade is the conduit for BOJ stimulus flowing into the S&P futures. Now, the Powell pivot is unwinding that trade.

USDJPY has flash crashed once already this year back in January. Long forgotten.

The weakest link in the global daisy chain is of course China, which just recorded its weakest GDP in 27 years. Which makes this all imagined realities 2019.

There were strong indications this week that the U.S.-China trade war is spilling over to the rest of Asia:

"Singapore saw exports fall for a second month in a row, this time by 17.3% in the month of June compared to a year ago"

The city state is one of the most trade-dependent economies in the world, and is often seen as a global indicator for trade."

Indonesia, which counts China as its biggest trading partner, also saw exports fall by 8.98% in comparison with the same period last year. And South Korea also saw exports fall by 13.5%."


Something's going to break. Hard.

OECD (2019), Composite leading indicator (CLI) (indicator). doi: 10.1787/4a174487-en (Accessed on 21 July 2019)


World's largest economies:

Don't worry, the Fed put will kick-in post crash. It always does...