My mantra is simple and what drives my Macro-To-Micro trading style: Policies lead economy. Credit leads equities. And Volatility reprices everything.

My Gone Fishing Newsletter is divided into basically three parts:

  1. Reflections and Inflections
  2. Sector Watch
  3. Macro Considerations

Market Thoughts – Last Week

While away from my trading desk last week, the Fed confirmed a stronger case for rate cuts and SPX ran to new all-time highs. This is not a surprise given it was Quad Witching Expiration and 26 out of the 29 last quad witching cycles saw a run-up into the date of expiry and weakness after – average .73 SPX pullback so not really alarming drop but a pause nonetheless. Also notably, Oil popped +10% (posting its best week since 2016), Gold touched $1,400 (a level not seen for five years), and US 10-year yields briefly fell below 2% (a level not seen since before the Trump election).


Fed head Powell did the market’s bidding – and new records for the S&P 500 were reached Thursday.

“The FOMC will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the Fed said in a statement, dropping its recent buzzword about being “patient.”

“The case for somewhat more accommodative policy has strengthened,” Powell said at a news conference to discuss the rate-setting Federal Open Market Committee’s highly anticipated decision.

“My initial thoughts are that the Fed did what the market thought they would do today, and offered to give them what they really want in the near future. That could be as early as July, and that could be as much as 50 basis points,” said Kevin Giddis, head of fixed-income capital markets at Raymond James.

Europe added to the party atmosphere when ECB President Mario Draghi at the annual central bank conference in Sintra, Portugal Tuesday said policy makers would consider “in the coming weeks” how to adapt its policy tools “commensurate to the severity of the risk” to the economic outlook, a signal that the central bank may be willing to lower rates.

And that drove Gold aggressively higher

There are a few schools of thought I have on why Gold went into escape velocity:
1. Uncertainty.  Gold is a hedge when investors are unsure where to invest with confidence when there is so much political uncertainty – Think G20, China Trade, Iran Sanctions…
2. Value. It is tough to generate a return where most global yields are falling so why not put it into a tangible asset?
3. Real Rates. The breakdown of Treasury yields and popping inflation expectations (due to the oil spike), caused nominal rates to decline. The result was a large drop in real interest rates which drove precious metals higher.
4. Rate Cuts. Gold rallies on the prospects of a weak economy as money moves into safe haven plays.
5. Treasury Shortage. This is more complicated but here is how it breaks down:

Coming debt ceiling+potential federal gov shutdown triggers…

1. Slowing Gov Spending =
2. No New Treasury Creation
3. Treasury Shortage = Lower Federal Funds Rate (FFR)
4. Excess bank reserves depresses interbank rate which causes the yield curve to invert
5. Gold Rallies with Treasuries (and Yen)!

**So when Treasuries are available again, rates will rise again!!

Macro Matters

Urgent UBS Report – Expect 20% Drop in Global Markets

Will the showdown in Osaka result in a takedown by the American administration? Stakes are sky high as we approach the most important meeting between America and China in a generation as tariff man comes back to the table. After the Hong Kong protests, America is in a strong position to heap more pressure on Chairman Xi to agree on a deal on U.S. President Trump’s terms. The Hong Kong mess has revealed that China has little wiggle room to maneuver and if they do play the long game and stall, UBS has signaled a violent drop of American GDP of 1.2% over the next 6 quarters to the US economy. Pencil in a 20% drop to equity markets as disappointment to this standoff could bring newfound contagion to the markets. Even though base case projections expect some modicum of coming together between the two countries, UBS has warned that economic numbers will go through the grinder if hostilities increase. A no deal would result in another wave of offshoring to South East Asia from China and now the Hong Kong economy is going through the gauntlet with newfound whispers telegraphing capital redistribution to Singapore. CNBC

Trade War Warning: 
The American Chamber of Commerce in China conducted a poll last month that found 40% of the group’s member companies had moved operations out of China or had plans to do so. But less than 6% of those were relocating operations to the US — the most popular destinations were Southeast Asia (24.7%) and Mexico (10.5%).
Small Cap Warning:
At a recent interview at the Economic Club of New York, investing legend Stanley Druckenmiller said “the best economic predictor I’ve ever met is the inside of the stock market.” And by that, he meant cyclical companies within the market — “trucking, retail, that kind of stuff, the Russell 2000(RUT)  .” He determined that the inside of THIS market is telling us to exercise caution.
Debt Ceiling Warning:
There is a shortage of treasuries which causes the Fed Funds Rates to fall triggering a yield curve inversion and lower GDP. Exactly what we don’t need heading into Debt Ceiling standoff and possible fed government shutdown in the Fall. And wouldn’t ya know, there’s been no add’l gov debt added since Dec likely due to the impending debt limit!

Economic Calendar

Monday June 24

The beginning of Summer
Japan Leading Economic Index and BOJ Minutes

Tuesday June 25

Fed Chair Powell speaks
OPEC Meeting (all day)
US Home Price Indices
US Consumer Confidence/
US New Home Sales
WTI API Oil Stock

Wednesday June 26

USD US ND Capital Goods (May) (e0.1% p-1.0%)
WTI EIA Oil Stock
JPY Japan Retail Sales

Thursday June 27

The final US GDP print is due.
EUR Germany CPI (e1.4% p1.3%)
US Jobless Claims
12:30 USD US 19Q1 GDP (final) (e3.1% p3.1%)
US Pending Home Sales (MoM)
JPY Japan Jobs/Unemp
JPY Tokyo CPI (e0.9% p1.1%)

Friday June 28

The G20 Summit opens in Japan
Today is the last day of the week, month and quarter, so expect additional volatility for rebalancing.
GBP UK 19Q1 GDP QoQ (final) (e0.2% p0.5%)
EUR Eurozone CPI (prelim) (Core YoY e1.0% p0.8%)
US Personal Spending/PCE MoM & YoY
CAD Canada GDP (MoM)
US Chicago PMI
US Michigan CSI

Looking Ahead – Calendar Risk*

Earnings Calendar

Inflection Points

My Fave Indicator -NYA is still a short at $13,000 until it can get AND stay above it.

Every prior Fed-induced recession happened because the Fed withdrew reserves from the system, pushing up interest rates.  It was the lack of money – the squeeze on reserves – that pushed interest rates higher and caused the recession.  Rates themselves don’t cause recessions, it’s the reason rates move that really matters.
Brian Westbury, Chief Economist, First Trust Portfolios LP

Volatility is just a blip but can quickly grow