1. OECD Composite Leading Indicators — the Global Growth Scare: The latest OECD leading indicators release (just out) showed a couple of important big-picture things. First, the global growth scare is real. The “OECD + 6NME” (i.e. global) leading indicator weakened to levels last seen in 1998, 2001, and 2008. Those are 3 very different scenarios!
So it’s interesting to note the second point: the diffusion index has increased for 6 months in a row now. This indicator operates with about an 8-month lead on the global composite leading indicator — i.e. the possibility of a re-acceleration in H2 is also real.
Key point: The OECD leading indicators point to improvement in H2.
2. The Fed vs the rest: Back in the USA, the softer growth pulse has swiftly shifted the consensus to expect rate cuts. It brings to mind this chart which I first talked about earlier in the year. I talked about this chart with regards to my bearish outlook on the US dollar.
There’s obviously a lot of moving parts, but if you look at this chart, strictly on policy rates, the US Federal Reserve has vastly more room to cut rates than its developed market peers. If the Fed moves into full blown rate-cut mode it’s quite likely that the US dollar rolls over into bear market mode.
Key point: The Fed has way more room to cut rates than other DM cbanks.
3. US Dollar & Asian/EMFX: As we head into H2 the path of risk assets in general, but particularly commodities and emerging markets is going to be heavily influenced by what happens with these 4 charts (i.e. bull case = USD breaks down, Asian FX & EMFX rebound, USDCNY at least stays stable). It seems like the same thing over and over again (US dollar) but there is some complexity to it, and a few things that need to go right there.
USDCNY is obviously the big elephant in the room, with the 7.0 (or 6.97 for that matter) level yet to be tested. But for me, I’m keeping a close eye on the DXY as the upside breakout looks to have failed, and a possible breakdown is on the cards (in a market where the consensus is crowded to the long side).
Key point: Keep an eye on the US dollar (and Asian/EM FX) going into H2.
4. WTI Crude Oil — Price Seasonality Shifts: Since peaking in April, WTI crude oil has undergone a 20% correction which has taken most traders by surprise (judging by the consensus long futures positioning). Looking at the chart below you can see the slump in oil prices came just after the end of that positive seasonal patch.
The seasonal tailwinds tend to pick up again from around late-June through early-October. So with geopolitical risks still simmering away in the background this is quite an interesting chart.
Key point: WTI crude gets a seasonal tailwind from late June.
5. S&P500 Valuations: Depending which metric you track (in this case I am using a blend of price vs forward, trailing 12m, and trailing 10-year average earnings), US equity valuations have come down noticeably since the peak in January last year.
On the numbers, the latest reading of the blended PE ratio is down -11% vs the peak, albeit it’s still +31% higher than the long term average. So while we can say that they’re not as eye-wateringly expensive as they were a short time ago, they’re not cheap by any means either.
Key point: US blended PE ratio is still 31% higher vs its long term average.Thanks for reading, I appreciate your interest in my work.