Macro is at a complete crossroads. No one scenario “has” to happen. The macro picture (economy & market) can go in many different directions from here. Which direction is dependent on a number of black boxes that we simply can’t see into. These are:
- When the Fed decides to raise rates next
- China’s management of the yuan (managed devaluation, break the peg, or fight to maintain peg)
- Presidential and down ballot elections (which parties control the house, senate, and executive branch)
We can’t know the outcome of any of these. But we don’t need to. We just need to form multiple hypotheses for different outcomes and update them as new information becomes available.
The Fed is playing a commendable game of mixed signaling. Some Fed members claim a hike is imminent while others say they will let things run hot. Their intent is keep the market on its toes; cooling speculation while buying time to raise rates.
The market is currently pricing in a rate hike in December. I believe a December rate hike is also likely but the weighting given to that hypothesis could drastically change over the next month depending on how econ data looks. But from the recent GDP numbers, the probability looks to have raised that the Fed will indeed raise.
The Chinese Yuan is within spitting distance of levels not seen since 2010. This is what’s been driving the bullish action in the dollar. If this trend continues unabated it will have big implications for global markets.
But there’s no way of knowing if this is the start of the devaluation we’ve been looking for all year. I’ve been hearing reports that China’s been hitting the gas on its resource binge. It’s buying up and storing astronomical amounts of commodities. There are some reports of large coal shipments coming in, only to be bulldozed right into the harbor; presumably because storage everywhere else is full. This is interesting considering the country has a supply glut problem.
The artificial demand they’ve created has reversed Chinese pricing for commodities. You can see to the right that steel has been leading the charge. This Chinese buying could also be one of the reasons for recent strength in emerging markets and oil.
The Chinese may be doing this as a way to diversify their holdings into hard assets. It could also be a strategic move. The Chinese might be concerned about future international conflict and want to store up essential resources in case their Pacific supply line gets cut. There’s no way to know for sure, but it’s interesting to postulate nonetheless.
Finally, markets seem to be assuming the elections are a lock for Clinton. I think she probably wins. However, I think the market is dangerously underweighting the possibility of a Trump upset. It may be a good time to buy some insurance over the next week. We may put on a strangle, since volatility is selling for a surprisingly cheap amount at the moment.
I’m looking forward to getting through these elections. Once they’re out of the way we should see some action return to markets. And hopefully some decent asymmetric trade opportunities.