Extreme Complacency on Russell 2000: Buy Puts

(from our Weekly of 21st February) As we have been noting, the market remains in a risk-on regime, with positive momentum, falling volatility and confirmation from various inter-market relationships such as cyclical stocks outperforming high dividend stocks, high yield outperforming…


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Short AUDCAD As Proxy China Trade

Although both AUD and CAD are commodity currencies, given Australia’s outsized exposure to China, AUDCAD can be used as a proxy trade on the Chinese economy. AUDCAD is approaching the top of its range just as Chinese liquidity is rolling…


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Rising Inflation in China

PPI in China has swung from deflation to relatively high inflation over the last 6 months. Wholesale prices are rising fast, import prices are also rising due to the lagged effects from a weaker yuan are moving sharply higher. (CPI,…


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‘Soft’ Economic Surprises Running Far Ahead of ‘Hard’ Data

For the past few months, we have noted in our Leading Indicator Watch publications that financial market inputs to our leading indicators were running far ahead of actual hard economic data. The same is true for survey data vs real…


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EURGBP: Deteriorating Rate Differentials

(from our Weekly Update of 14th February 2017) Rising inflation in the eurozone is driving real rates lower, widening the rate differential between the EUR and other DM currencies. We look at risk-adjusted real-rate differentials by dividing real-rate differentials by…


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The Dark Side of Reflation

Higher economic growth usually translates into higher bond yields, higher stocks and rising oil prices; but, too much of a good thing is bad for stocks. Over the past few weeks, we’ve shown that our stock/bond RSI signal has triggered….


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No Margin Support for Equities

P/E expansion has been an important driver of US equity returns in recent years. The left chart shows the disaggregation of returns in 5 year blocks going back to 1996. As we can see, in the years 2011-2016, 55% points…


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Australian Banks: A Shorting Opportunity

The housing-driven downturn we have discussed through last year continues to develop, albeit at a slower pace than we originally expected. The situation is deteriorating, though, with building permits – the best leading indicator for housing – now falling at…


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Oil Goes from Tailwind to Headwind

In most economic cycles, commodities rally very late in the business cycle, and often oil doubles in price before downturns.  Our leading economic indicators are not forecasting an immediate economic downturn, but we are very definitely late cycle on a…


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Economic Surprise Indices to Fall Due to Rising Oil and Yields

S&P 500 returns are positively correlated to the Citigroup Economic Surprise Index.   The Surprise Index leads the S&P 500 by about two months, as you can see from the chart on the left.  Normally, low levels in the index are…


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