Global Macro Markets Report (June 11 – June 15 2012)

(C) Ricochet Alternative Asset Management 2012

Dear Reader(s),

The U.S. markets this past week gained the most YTD as upward volatility in the markets created tail-risk for the short sellers.  The markets responded to a sort of detente or easing of tensions regarding a breakup of the eurozone via the exit of one of the peripheral nations.  The forbearance expected by EU and eurozone leaders with regard to structural fiscal and monetary mechanisms to ensure solvency going forward in the ‘zone’ assisted to propel the global markets forward.  The easing from the People’s Bank of China (PBOC) further facilitated momentum to go long to which the shorts were forced to cover.

United States

The indices all fared well for the week as the Dow closed up +3.59%, the NASDAQ +4.04%, & the S&P500 +3.73%.  Better than expected data from the services sector & the PBoC announcement of a reduction in borrowing costs via rate 1/2% rate cut proved bullish for the markets.  The move essentially coincided with the federal reserve economic outlook & policy statement to which game theory of musical chairs predicated market sentiment.  The peering eyes of the market have already announced pseudo-coordinated central banking movement as a function of macro monetary economic policy.  The market interprets that as “More QE?”  As such, the U.S. indices all moved up from Wednesday through Friday’s close.  The NASDAQ led all indices followed by the S&P500 & Dow as U.S. sentiment increased with technology seen as the resilient sector of the U.S. economy.

The week ahead will release additional U.S. macroeconomic data reflecting the underlying micro economic conditions.  The important data pertain to Retail Sales & PPI (Tuesday), CPI (Thursday), & Industrial Production (Friday).  As growth in the U.S. takes the global macro center stage, these reports as well as earnings releases from AEP Industries (Monday), Casey’s General Stores (Tuesday), & Pier One Imports (Thursday).  Given the aforementioned data releases, the U.S. markets are likely to close above Friday’s close as dark clouds start to dissipate from over Europe and the relatively strong dollar keeps affordable the  commodities linked to consumer growth.  The targets for Friday’s close are Dow 12600 (.20), NASDAQ 2900 (.20), & S&P500 1335 (.20).

Recommendations

Citigroup: C

GlaxoSmithKline: GSK

Automatic Data Processing: ADP

Central & South America

The IPC (Mexico) closed in the green +0.38% as relatively little buying or selling occurred throughout the week.  The basic materials stocks fared the best followed by the consumer, non-cyclicals, & diversified.  The IBOVESPA (Sao Paulo) closed up +1.36% as communications & utility stocks pulled up the index followed by financials & basic materials.  I consider these to be a defensive bull play, bullish yet defensive given the macro & micro economic conditions of rising inflation coupled high wages & falling output (productivity).  The IBOVESPA tends to do well when the U.S. markets are lagging to which the U.S. markets should be leading the coming week.

The MERVAL (Buenos Aires) closed in the red -0.75% as sentiment in Argentina remains morose.  Selling on Monday & Tuesday followed w/the global bull sentiment on Wednesday through Thursday didn’t last on Friday as the index sold off the gains going into the weekend.

Europe

The FTSE closed up +3.32% as buying into the index was reflected in an upward buying trend line throughout the week.  Utilities, communications, and consumer non-cyclicals led the incline.  The bull sectors were similar to those of the IBOVESPA which is the defensive bull play.  The DAX closed in the green +1.33% reflected the buying pattern of the IPC index however w/greater downside & upside volatility as measured by the percentage movement of the index.  Utilities & consumer non-cyclicals led the gainers – defensive bull play.

The CAC40 closed up +3.43% as the index pushed higher on Tuesday (+1.07%) and Wednesday (+2.42%) with Thursday & Friday’s trading essentially breaking even therefore keeping the gains from Wednesday’s close.  The gainers were utilities & consumer non-cyclicals.  The BEL-20 (Brussels) closed up +2.23% with major buying on Tuesday (+2.43%) & trading down marginally on Friday.  The ATX (Vienna) closed up +2.09% with buying throughout the week yet notably on Tuesday (+1.62%).  The SSMI (Swiss) closed in the green +1.59% however the index bottomed out on Tuesday after selling on Monday (-1.11%) followed by major buying on Wednesday (+1.89%) & Thursday (+0.80%) with flat trading on Friday.  The SSMI was led by the communications & basic materials sector(s).

The sentiment for Europe is of a defensive bull play.  Buying into Europe is into defensive stocks as consumers will spend money paying utilities and on communicating (love phone chatting) to which telecom stocks such as Swisscom AG will remain attractive.  Energy stocks remain bearish for utility energy distributors however utility services & supplies stocks such as Severn Trent (SVT:LN) are bullish.  As the prospects for a unified eurozone strengthen along with the economies of the eurozone’s trading partners, the markets for Europe are bullish going forward.  The BEL-20 is the index I predict will perform the best over the next few weeks given resiliency in maintaining gains created from upside volatility.

Asia & the Far East

The Sensex (India) closed up +4.72% on the premise of stronger global macro economic conditions precipitating a higher index valuation going forward (fundamental analysis).  India has major macro economic headwinds however to which the major gainers such as Industrials & consumer non-cyclicals remain at risk of exposure & losses to downside volatility.  Utilities are strong and should remain strong going forward.  The TA100 (Tel Aviv) closed up +3.30% as the index exhibits a healthy linear rise throughout the week.  The bullish global macro sentiment pushed the index higher yet the move reflected stable sentiment.  As the global macro economic picture brightens for Europe & the U.S., Israel’s stock exchange stands to benefit.

The Nikkei225 closed in the green +0.23%  however closed down sharply on Monday (-1.71%) followed by buying from Tuesday through Thursday (+4.15%) & selling on Friday (-2.09%).  The absolute volatility of the index over recent weeks has elongated the left & right tail as reflected by the alpha necessary to show statistical significance.  Financials, energy, consumer cyclicals & technology were all major gainers on the week.

The Hang Seng closed down -0.30% on the week as the index sold off on Monday followed by buying Tuesday – Thursday & selling on Friday.  As gains were not kept going into the weekend, the Hang Seng is reflective of fear with regard to a greater than expected slowdown in China’s growth. Financials, energy, & consumer cyclicals were major gainers on the week, which reflect… growth.

The Shanghai Composite sold off, closing down -3.88% on the week in a decidedly bearish move.  The index sold off on Monday and did not see any upward momentum throughout the week.  The index is expected to close above -3.88% by week’s end thereby regaining some losses however not expected to break even as there may be ‘two China’s’…

The Straits Times closed marginally down -0.28% as the index sold off the slight gains made over the week.  The TSEC (Taiwan) closed down -1.50% on the week, experiencing greater downside volatility to the Straits Times.  A slowdown in Taiwan may be predicated on less demand for exports as the country appears to be holding up with regard to internal consumer demand for domestic production of goods & services.  As such (given the region), Jakarta closed up +0.67% & NZX50 (New Zealand) closed marginally down -0.07%.  New Zealand has performed adequately well over the recent weeks & is up +0.46% over the most recent 3 month period (03/09/2012 – 06/08/2012).

Commodities & Futures

NYMEX WTI +2.88% at $84.10/bbl (range: $81.42 – $86.83) WTI has traded higher on a weakening USD as the Fed is expected to extend Operation “Oliver” Twist at the end of the month.  I believe WTI under $88.50/bbl is bullish for the U.S.  as national gas prices at the aforementioned WTI price is about $3.63.  Prolonged exposure to these oil prices (and lower) will further drop gas prices as volatility in oil pricing stabilizes to enable the market to adjust to QD*P/QS. QS as estimated will be higher than QD to which gas prices will be lower based on the difference in the estimate. Brent +1.04% at $99.47 as the weaker USD ruble currency trade has pushed Brent upward however remaining below $100.00/bbl.  Global supply & demand for oil will continue to increase as alternative energy fuels continue to enter the market.  Global growth is threatened as Brent increases above $100.00/bbl

The bullish global growth story is reflected in the commodities below…

Orange Juice is still likely to push $120.00 and demand futures contracts will remain strong.

Gold -1.56% at $1590.10/troz (range: $1566.50 – $1639.70)

CMX Copper +1.28% at $3.28 (range: $3.245 – $3.417)

Corn +5.78% at $598.00 (range: $561.00 – $604.75)

Orange Juice +2.61% at $112.05 (range: $109.20 – $118.70)

Cotton +9.10% at $72.90 (range: $66.25 – $73.89)

Currencies

The € has strengthened marginally against the USD ($1.24 to $1.26).  The euro will likely remain in the trading band range of $1.24 to $1.28 as monetary policy going forward will seek to maximize growth globally and seek to protect peripheral Europe from monetary disaster as a function of failed fiscal policy & assumed banking risk.  The ¥ has weakened against the € as the EURJPY is back to over ¥100 per €.  As the dollar weakens against the euro, the yen should strengthen against the euro and strengthen against the dollar.  The GBP will likely retract toward ¥120 per GBP yet appreciate to $1.56 against the dollar.  The Aussie should strengthen against the USD with upside to $1.02 over the next week.  Kiwi trade is getting interesting as the USD appears to be making lower lows against the NZD.

Bonds

The U.S. 2 yr has fallen below par w/the yield rising from a 1/4% to 0.27%, marginal yet important as marginal changes in the yield have exponential effects on principal valuation.  The U.S. 10yr is on the rise again with expectations of Europe improving, U.S. 10yr yields should trade in the range of 1.67% to 1.75% over the next week.  Australian yields have fallen from around 3.20% as capital continues to finance Australian growth via debt purchasing.  Although the principal remains sticky, the yield on the Greek 10yr continues to fall geometrically, which points out bullish sentiment with regard to Greece’s future.  The spread on the Spanish 10yr & Italian 10yr bond yield will continue to close as worries surrounding Italy increase and fears surrounding Spain ease given the recent bail out.  These events should push yields of ‘safe haven bonds’ higher, I expect the German 10yr bond to touch 1.38% toward week end.

Thank you for your time & enjoy the week ahead.

Best Regards,

Vidia – Founder/President – Ricochet Alternative Asset Management

Sources:

http://www.bloomberg.com

finance.yahoo.com

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