Global equities were 30bps lower last week, with weakness concentrated in Europe, Japan, and Latin America. US equities finished marginally higher, rising 15 bps, while frontier markets were the best performer (+2%). Sectorally, US tech led the way along with global defensives, while cyclicals lagged. US HY spreads were higher across the board, led by US tech (+3%), as credit was pressured.

The dollar was much firmer versus nearly every pair. Latin America reversed most of last weeks gains, and the Aussie dollar took a hit following accelerating economic weakness and dovish CB rhetoric. Crude was lower by over 4% along with both base metals and ags.

Global rates were lower across the board and are continuing to confirm the global economic slowdown. That said, US rates still have not priced in the domestic or international slowdown – which likely leads to a gap fill in the next 2-3 months.

German 10s broke through support and will likely continue trend as there is no leading evidence of a pick up in Europe, but continued weakness.

The same thing is true for Japan, with rates in trend mode lower and possibly setting up for a parabolic move.

So far US earnings have come in around the historical average in terms of EPS beats, but they are set to go negative in Q1, as the WSJ shows below. In classic Wall Street style, the street expects EPS to rebound to +2.5%  in Q3 followed by +9.1% in Q4, according to Factset estimates.

We think this is almost the inverse of what gets printed in the back half of 2019, as our model implies earnings are closer to $140-150 vs. current FY19 estimates of $168. Assuming our model is correct, we would apply at 15x multiple to $150 to put fair value closer to 2250 for the SPX.

With earnings set to decline after 8 consecutive quarters of positive prints, we can see from Sentiment trader (sign up here) that forward returns are not great.

And we’ve recently been rejected at the 200 day following multiple upside exhaustions, which is also not great for forward returns.

On the economic data front, US manufacturing orders ex transportation fell to 2016 lows.

With further weakness in the non-manufacturing ISM.

And retail sales look to have declined materially, which we pointed out last week.

On a relative positive, the European services PMI stabilized at 51.2.

But German manufacturing orders continued to deteriorate.

The next few weeks will likely determine the direction of the market over the next few months, so it is quite important to pay attention to price action. Our bias is lower given our work, but if the S&P’s able to break and hold 2730-2740, more upside is likely.

Rates lead us to believe that Spoos likely need a breather however.

And are in trend mode lower.

Have a good week.




Teddy Vallee Uncategorized

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