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Mild decoupling has been a staple recently within the macro picture. U.S. earnings and the lack of action on the Euro front, due in part to the German's delayed court ruling on the constitutionality of further Euro action, has led to a solid uptrend in equities, and a solid downtrend in the euro. The equity picture can be consolidated down to a few aspects. The widespread distress caused by pan European troubles, bearish on global growth, earlier in the year led to negative revisions to earnings and revenue estimates. This led to a lower threshold that must be overcome to beat on earnings announcements. With the nature of corporate America, they overcame weaker revenues and showed their lean strength on earnings, up to this point. This signaled that at least on the front of equities, all was not as bad as it seemed. The framework of the market has, over the short term, shifted to domestic corporate strength and away from the fiscal issues impending both here and abroad.
Within the FX realm, the dollar has shown strength on the premise that weak data has failed to spur the Fed into action just yet. Although central banks across the world have rushed to aid in recent weeks, Bernanke does not share in conformity. The labor market has shown its weakness, but repeated exposure to quantitative easing may have diminishing returns for financial markets. This has been an aspect of the lack of action to date. The IMF has negatively revised global growth from 4.1% to 3.9%, and cites Europe as a concern. Much of the news leaving Europe does not inspire hope of anything more than further idleness before legitimate action is forced upon them. This bodes negative for the euro. With the latest negative comments coming from Merkel, look for the euro to show weakness, except on days that the U.S. releases negative economic data. These are opportunities for short covering due to lack of fear for near term U.S. stimulus.
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On the oil front, the risk of rapid escalation of violence within the middle east is beginning to show its hand. Geopolitical risk has always been one of the main drivers of Brent spiraling higher. With the recent U.S. Naval incident, on top of Syrian and Iranian violence, Oil looks to be on a move higher for the time being. Brent's drastic decline earlier in the year helped ease inflation concerns, but with its return, it only adds more stress to a gradually improving economic climate. Similarly, droughts and vast heat waves have left crop yields in the Midwest U.S. at record lows. The grain bull run has been severe and at this point, the little rain we are getting, is doing little to offset damage already incurred. This is another threat to the U.S. consumer. With retail sales weaker this past month, higher commodities are negative on both sentiment and purchasing power.
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Treasuries remain elevated, but this trade is far overdone. The yield curve has been manipulated in "loosely" ways similar to that of Libor. Libor was kept artificially low to give off the perception that the environment was better than it really was. In the case of the Fed, they have pegged short term rates to zero and long term rates have been manipulated through easing and twist. Markets therefore have to live with the curve presented. Does it represent a dire situation that the 1% yields infer? In my opinion no, and stronger corporate results reiterate that. Putting dollars into treasuries creates nothing, yet putting cash into highly adaptable equities presents a brighter future. For this reason it looks to be that treasuries may pull back.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
