Daily Briefing - For Monday, July 18

Stock markets globally are fraying at the edges after running in short-sellers. There is no change in our market view. That was perceiving stabilization strength in early to mid-July, which probably saw an upside capitulation by bears early last week. And a suspicion that central banks here in Europe will take the lead to temper a bit of the bond market's euphoria, perhaps even within the next couple of days.

 

We believed that the stabilization (and bear rout) would end around mid-July and we believe it did; perhaps a couple days earlier for that matter.

It's not decisive yet; remains fluid; but especially if the ECB moves to stabilize, you just might see credit market and other shifts this week that put equities into more defensive modes. 

The key to this will never be an admission that central banks have essentially been on some sort of collective money-printing suicide mission; but some will view it that way. 

If we open down on Monday, I suspect there will be rebound efforts, but actual capitulation highs may remain behind, even if approached again near midweek. On a preliminary basis we'd look to fade intraweek rebounds not initial declines; and see virtually no low-risk investment cases for markets at these levels.

  
The financial future enters a 'gray' area - given the green bombardment many central banks contemplate; in the form of so-called 'helicopter' money. There is a carefree attitude of 'why not' stimulate everything further at such low interest rate times; without a bit of concern about how this rolls-over in the future. Or perhaps a worse fate for monetarists; the impossibility of hiking rates with the extent debt levels have, or will have reached. They may view this as plausible; but there's a problem: that's the history of markets often moving rates irrespective of 'official' policy intentions (look for instance at some European default spreads of-late). 
 

Thursday morning the post-Alcoa results euphoria continues, with JP Morgan's results topping estimates, and with BlackRock Q2 results at least meeting them. So on the surface things 'appear' sunnier while the forward risk of gasoline being thrown on the monetary fires seems to be subordinated to the 'here-and-now'. 

Technically - the type of thrust we just had, especially as 'helicopter money' plans were either leaked or rumored (clarity remains to be determined as to which has occurred), gradually sucked in more money and improved basic participation. In a market like that with breadth improving as money comes in, you don't presume it's a final blow-off; though one should be aware of the possibility. 
 

Markets are largely being driven by momentum, not valuations. Furthermore, as we called for the big 'brick-wall' shakeout as the year began; we can see (below) how money came out of the market. This triggered the persistent ensuing thrusts to the upside, 'even as' most all reports of hedge fund activity or so-called 'wealth management' high-net-worth accounts showed on-balance liquidations. 
 

The mystery of this was suspected to be sovereign buying or yield-chasing flows primarily from abroad. Apparently it's been more than that as the accompanying charts show; regarding central bank liquidity withdrawals or recently injections. In fact, this most-recent surge in net global central bank asset purchases takes that to their highest levels since 2013; and may also not be particularly sustainable. 

 

As to Brexit; realization that the EU needs the UK at least as much as the inverse is something I've contended all along since identifying both the purge and surge that followed (albeit this was taken to absurd extremes on Bernake/Karuda's BoJ / Fed meet, which is presumed to have been an endorsement for massive newer stimulus from Tokyo, which the BoJ does say is forthcoming... and further risks a debt embrace that might ultimately prove unrecoverable for Tokyo.. we'll see). 

The combination of money flows in essentially a parabolic thrust with breadth, is a sign of a mature (to say the least) up move; but also one unwise to be fighting aggressively; and we are not. While I have doubts that this move (and with some adjustments or corrections) can hold together  I'd like that to be the case. Perhaps it will settle into a high-level sort of range, rather than reverse straight-away; leaving open 'hope' for more upside thereafter; and (for once) avoid either a V bottom or spike-top kind of resolution, of which the market has had a series of over the course of many months. To wit; a market that spikes here a bit, corrects, but then tests the highs before roll-over risk becomes more evident, is one that will leave more traders and investors just confused as to what comes next. We suspect it's more dangerous than realized.