As the calendar rolls towards Christmas, most fund managers have already ripped the December page off their wall calendars waiting for 2019, with a few still holding onto to their investments with a fine thread almost at the verge of unravelling. We are facing a weakening fundamental backdrop, lower profit margin outlooks, tighter financial conditions, unsettled Trade War negotiations and a Fed that is unsure what to do.
Technical chart patterns indicate further bearish momentum, and machines flip from buy to sell in a matter of milliseconds on any relevant headlines. Usually this is not a problem, but when the market is on the verge of a break in longer-term support trends, this knee-jerk reaction could have much more disastrous implications. One glimmer of hope is that valuations are not that stretched. We now await the Fed FOMC meeting on December 18 to see what the future holds for the USD and equity markets.
Chinese macroeconomic data was released Thursday night for November. Retail sales saw a big year-over-year (yoy) miss, coming in at 8.1% vs 8.8% expected. Industrial production came in at 5.4% vs 5.9% expected. Retail sales growth is at its slowest since the peak of the crisis in November 2008, and industrial production is the slowest since 2003!
China's used car inventory is at record highs as car sales fell for the sixth consecutive month. The slowdown in M1 supply growth has negative implications for China's growth going forward. Offshore yuan, after trying to rally towards 6.84 vs. the dollar, is now back above 6.90 -- closer to the key 7 level vs the dollar. In summary, more growth and stimulus measures are needed despite PBOC efforts to boost the economy over the past few months through infrastructure spending.
Copper is once again testing the key psychological and fundamental $6000/tonne support level. Fundamentals and cash to 3-month spreads indicate tight markets, with supply outlook for the next year looking less robust. In a quiet, derisking market lacking liquidity and uncertainty, anything is possible over the next two weeks. The question is, can you as a fund manager take that marked-to-market risk going into year end?
Hedge funds are dominated by the performance on a monthly basis, even though investing should be about longer-term performance than focusing on day on day movements. If the yuan devalues further and breaks the 7 level vs. the dollar, make no mistake, copper and all base metals will be knocked down immediately, as they were back in 2015/16 -- never mind fundamentals.
After OPEC and OPEC + announced cuts of 1.2 million barrels per day at their latest meeting held last week in Vienna, this provided some support to Brent trading close to $60/bbl and WTI at $50/bbl. However, the price is at fair value right now, not cheap, and the market is still flush with oil and products, they are just adjusting it slightly to gauge how demand will develop over the next few months.
If they overtighten, markets can risk squeezing higher aggressively -- curbing growth altogether. It requires delicate navigation while not knowing what the true power of U.S. Shale growth is for next year.
Stage lights have moved to face Fed Powell ahead of the key FOMC meeting on December 18. The market has done pretty much most of the work for the Fed by adjusting the future dot plots lower to assume about a 50% chance of just one rate hike next year, down from 3 rate hikes for 2019.
All Powell needs to do is nod his head that they are closer to the "neutral rate" and that growth outlook is moderating; a hint of dovishness and everyone's Christmas wishes will come true, market rips higher as dollar falls.
But any stubbornness to veer from the path of "gradual rate hikes" and it is game over, markets will sell down all risk assets. Whether we like to believe in diversification or believe we can generate "alpha," everything is all linked to the same trade. If the Fed disappoints, then the onus will fall on Trump. Hmmm, think I would rather take my chances with the former than latter.
Tick tock, tick tock... all eyes on the Fed now.