In today’s briefing:
- Investing in an Era of Fiscal Dominance
- Tripwires to a Deeper Correction
- Positioning Watch: The USD Wrecking Ball & Oil’s Roaring Rally
- Portfolio Watch: Anyone still in doubt of the US superiority?
- Supply Tightness, Robust Demand Could Push Crude Oil Prices Into Triple Digit Territory
- To Hike or Not Hike? ECB Doves and Hawks to Delicately Balance Between a Rock and Hard Place.
Investing in an Era of Fiscal Dominance
- The Big Idea at Jackson Hole in 2023 is fiscal dominance or the problem of big government deficits and skyrocketing debt around the world.
- Governments will have less fiscal room to deal with the next crisis and monetary policy will have to step in to do more of the heavy lifting.
- For investors, risk estimates based on historical data may no longer be applicable in a Fiscal Dominance regime characterized by heightened cross-asset volatility in the next crisis.
Tripwires to a Deeper Correction
- While our base-case scenario calls for an S&P 500 bottom at about 4350, we nevertheless have to allow for the possibility of a deeper correction.
- It could be argued that a lack of extreme fear and oversold conditions opens the door to further downside risk.
- We would prefer to see relative support broken on either megacap growth or small caps and monitor how market psychology evolves.
Positioning Watch: The USD Wrecking Ball & Oil’s Roaring Rally
- In a week where the USD is celebrating its longest rally streak in 9 years with 8 consecutive weeks of outperforming currency peers, it’s noteworthy how both commodities have remained resilient and energy managed to rally
- Not only does this reinforce our US bull case, but it also lends support to my recent bearish stance on emerging markets
- US imports being down some 5% on a YoY basis for Q2 is not exactly helping struggling players here either.
Portfolio Watch: Anyone still in doubt of the US superiority?
- Avid readers of our research have likely noted how we have mentioned the US macro superiority to the Euro area in right about every single article this week.
- ISM Services rebounded (in sharp contrast to consensus), while Services declined faster than feared in core countries in Europe.
- It takes a very stubborn Chinese, German or Frenchman to argue that the US is not in the driver’s seat of economic growth globally, but has the market turned long US bets into the consensus position?
Supply Tightness, Robust Demand Could Push Crude Oil Prices Into Triple Digit Territory
- Oil majors to extend voluntary production cuts with an eye to pushing crude oil prices to $100/barrel.
- Demand for oil at record highs, fueled by strong travel, increased oil usage in power production & solid Chinese petrochemicals activity.
- Refiners are reaping near-record profits as their throughputs are set to reach a summer peak of 83.9m bpd in August.
To Hike or Not Hike? ECB Doves and Hawks to Delicately Balance Between a Rock and Hard Place.
- Under 12 months, the ECB has lifted interest rates, an unprecedented nine times from minus 0.5% to +3.75% to combat surging inflation.
- Ahead ECB meeting on 14/Sep, surveys show an almost even split between those anticipating a tenth sequential hike and a “hawkish pause”.
- ECB is data dependant. But the data is sending mixed signals. Will the ECB hike to fight stagflation risk or resort to a hawkish pause?
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