Europe comes into the session higher, but risks of a double dip recession have risen as their Purchasing Managers Index (PMIs) contract under the 50.0 mark to 49.4. Less than 50 signals contraction. A second wave of infections, rolling shutdowns, and hold-over scarring from March and April continue to crunch the Euro Zone economy. Bottom line, Christine Lagarde and the ECB are likely to begin to signal additional stimulus measures at next weeks ECB meeting – we’ll keep our ear to the ground as that meeting draws closer next week. EUR/USD +0.29% this morning.
Oil: since making the pivot back to Scen 3, Growth Slowing /Inflation Accelerating we’ve continued to see the broader commodity complex reflate. The last participating member, and a typical top LONG position in a stagflation environment is Energy. Nat Gas has lived up to its end of the bargain, however Crude Oil, RBOB, and Heating Oil have not. They may be changing soon. The quant indicators are suggesting higher in Oil, as momentum remains positive and structure is supportive. Oil moved to bullish “trade” yesterday (still neutral “trend”). Perhaps there’s a piece of news floating out there to give this market the catalyst it needs to springboard higher. Yesterday’s move in Spdr etf XOP (SP Oil & Gas Expl/Production) may have laid the initial ground work for a rally to follow.
Treasuries: Bond yields are moving, however now signaling immediate overbought at 86bps. This is the part of the Full Investing Cycle where things that have worked consistently for the past 2yrs (we went bullish on treasuries Q4 of 2018) start to underperform. Sort of like our pivot in the Russell 2000 this week, we’ve pivoted in treasuries last week as well, despite Bonds being listed as overweight in Scen 3 in our model. Embrace the non-linearity of this game. Yes we bought Russell and yes we shorted treasuries, and I could certainly flip that position again simply for a trade. Remember, the bond market was nationalized back in March/April. The Fed could easily step at any moment and announce more Treasury purchases.
Question: We’re dancing on a razors edge still in terms of probability risk of Scen 3 vs 4 in Q4 2020 (in favor of Scenario 3). But honestly the biggest question I’m asking myself is when do we flip to Scenario 2 and away from Scenario 3 – well we may be seeing the beginning stages of that trade now as Treasury yield reflate (albeit modestly) and Small cap stocks gather steam higher. We need more time and space to make that call, and certainly wouldn’t mind getting past Nov 3rd. You have to remember, Q1 and Q2 of 2021 will be comparing against the Covid-19 Pandemic data – its assured we will be accelerating in all areas of data on year over year comparison. Steering out of a market squall of the likes we’ve never seen before can be a challenge, but we’re welcoming the challenge.
Good Luck, all the best