A late afternoon update mainly for internal consumption (but feel free to forward to clients with relevant disclaimers)
Today's earlier updates:
The US Dollar is leading this move: https://www.tradingfloor.com/posts/macro-digest-usd-your-main-catalyst-6032712
Targets reached in equity markets: https://www.tradingfloor.com/posts/macro-while-panic-is-sneaking-into-market-note-this-we-have-reached-all-of-our-targets-today-6045637
The basic premises underlying my calls:
1.) Market price action dictates direction – traditional support levels was broken violently. Today market was the MOST ENERGIZED sell-off since 2008/2009.
2.) The US$ lead this crisis and will lead back up when low is in….
3.) We have reached most of my technical targets and below is my primitive "expected" path from here. (2015 low getting established)
4.) We will see recession by H1-2016 combined with lows in all cycles – this past week was a "starter" to a bigger menu post FED (Sep/Dec or not at all)
5.) Fed should move in September, failing to do so could delay FED all the way to 2017 based on 4.) (Fed is now 24% likely to move acc. to market down from 50% one-week ago). The reason they "should" move is that the market and economy need a higher nominal "clearing yield" to get going again, but more on that later this week.
Strategy next few weeks into FED crucial September meeting
We are close to have exhausted the downside for now – however in classic fashion there should and will be re-test of 9.300 DAX and 1825/30 in S&P before we can move up.
I firmly believe US$ is leading this sell-off – All "evils" comes from the way the monetary system creates debt mainly in US$ and then recycle capital back to US capital markets. China have allowed themselves to "question" this recycling & FIAT money system but allowing market based prices to dictate CNY and down the line activating the Silk Road project.
Here is simple explanation of why I think US$ leads the markets:
US$ gets stronger è Increases price of servicing massive US$ debt è creates devaluation to maintain export share
è reduces commodity prices è reduce growth for emerging market economies è exporters lose market
US$ gets weaker è commodity rises è reduces burden on debt and commodities è re-sets growth higher.
We live in a FIAT economy with the US dollar as the reserve currency. Since the financial crisis started we have seen a massive amount of increase in total debt – McKinsey estimates that global has risen by 57.000 bln. USD since 2007 – I will let you think about that number for another two minutes! It has made global debt to GDP ratio rise by 17% percentage points (Avg. is >200% debt to gdp)…..so..
57 trillion US Dollar of new debt has kept the world economy alive…..but most of that debt has been created by EM economies which borrowed cheap in US Dollar and invested into the domestic economy. Now as US Dollar peaked so did "debt burden" and at a time where the strong US Dollar also made the commodities the cheapest in 15 years – hence no real income.
The credit cycle – as in credit spreads – hit all-time low in autumn of 2014 – the first sign of "cost of capital" rising – CoC – since it has been one way and its up in price of money.
Then the US dollar peaked – DXY – in May, and then stock market in July/August. The peak in US$ co-incided with "final move" down in commodities driven by perfect storm: Strong US Dollar and higher cost of capital which equates to a HUGE margin call on US denominated debt – which all EM countries have, hence making whether they are net importer or exporter less relevant. Add to this a massive de-leveraging cycle in banking through regulation and the cost of capital will remain elevated to the level seen in the autumn of 2014.
The US$ led us into this correction and it will lead us out through the mechanics of the above.
Now below the chars for:
S&P-500,Shanghai, FTSE, AUD, 10 YR US…
Conclusion:
The market would not have "allowed" such a deep correction in 2010,2011,2012,2013 or 2014, and the fact we did have this move today partly confirm my theory that we are moving towards a status/mode where monetary policy CAN'T help, where central banks increasingly is acknowledging that disadvantages of too low policy rates outweighs advantages. The early beginning of the end for Pretend-and-extend?
We basically have seen the early start of a true business cycle which allows for correction, resetting of prices and a better marginal cost of capital structure – if today felt heavy/bad then cheer and realize that the economy will come stronger out of this is this conclusion is confirmed.
Finally,
Please admire the skill of this young lady!!!
http://ftw.usatoday.com/2015/08/girls-softball-trick-shot-is-better-than-any-bat-flip-youll-ever-see
Safe travels,
Steen
PS:
Sometimes a picture tells a better story – from my live interview with Danish TV2 today… note the "bear"…..
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
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