IMF, Xi Xi and Marty Gilbert Accentuate the Negatives - Mkts Under Siege

What You Need to Know Today

• Stocks begin the week under siege

• IMF, Xi Jingping and the newest star – Martin Gilbert all taking negative on the mkts

• Davos 2019 – The 4th Industrial Revolution

• Black Swans/Grey Rhinos – Bulls and Bears – What’s it all mean?

Stocks continued to rally on Friday…..fears of a global economic slowdown were a distant memory as the automated systems ploughed higher…the Dow closed up 336 pts or 1.4%, the S&P up 34 pts or 1.3%, the Nasdaq added 72 pts or 1% while the Russell tacked on 15 pts or 1%.  Eco data that showed that Industrial Production and Capacity Utilization remain strong, the labor mkt remains healthy and indications from members of the FED continue to suggest that the FED will be flexible regarding future monetary policy all contributed to the feel good mood on Wall St. ….while continued strides in trade talks carry up the rear….. Just for the record – the mkt has recovered substantially (not completely)  since the December meltdown  - suggesting that the turmoil created in December was a complete overreaction to the US macro data.   YTD the Dow has gained 5.9%, the S&P 6.5%, Nasdaq 7.2% and the Russell is the best performer at +9%. 

Now look – it’s not all clear just yet….Yes – the mkt has made a nice V shape retracement – and on Thursday last week – we broke up and thru the first real point of resistance – the 50 dma – where it is natural to expect the mkt to test and fail – but it did not.  The news was good on Thursday and then the algo’s continued to push higher on Friday as word spread that President Xi Jingping has offered a 6 yr boost in US imports into China as he tries to bring Donny to the table and that caused further excitement sending stocks higher……..    Now the S&P looks great on the chart – but do not get yourself all excited just yet….We want to see it back off  - the 50 dma which was resistance is now by all technical definitions – support.  (Remember - when you are below the trendline – the trendline represents resistance – but when you are above the trendline – then the trendline represents support)  So - the S&P closed at 2670 on Friday – so SUPPORT is now 2625 – or the 50 dma – the question is – will the buyers defend that position if we test it? 

So now here is the funny thing.  Global mkts were all open yesterday – Asian mkts were higher even though China reported that its economy ONLY grew by 6.6% in 2018 (The US is growing at 3.4%)  - or the slowest official pace in 28 yrs and 4th qtr GDP came in at 6.4% also in line with the expectation.  Now while the headline number appeared to be ‘weak’ there was a silver lining……Industrial output grew better than the expectation…at 5.7% vs. 5.3% -besting the November data point of 5.4%.  Retail sales – rose to 8.2% from 8.1% in November.  …..but don’t get your panties in a bunch – the mkt has been expecting this – talking heads have been suggesting that this was going to happen for the past year – so why when it does happen are the mkts or investors surprised?  

Then on Monday – the IMF (Int’l Monetary Fund) cut their 2019/2020 global growth estimates again (second time in 3 months) – more ‘negative news’ …..citing a weakening German economy and the latest slowing Chinese economic news based on the Sunday night GDP reports.  This means that the IMF is now expecting global growth to be 3.5% and 3.6% in 2019 & 2020 respectively.  That is down from their first revision in October to 3.7% for both 2019 and 2020.  Now look – a global growth rate of 3.7% is nothing to thumb your nose at – but the headlines suggests that the IMF is cutting their estimates – and that suggests something negative…..and so the algo’s read that and boom – they hit the sell button….sending mkts lower today. 

[The IMF is an international organization headquartered in Washington, D.C., consisting of "189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world." Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry Dexter White and John Maynard Keynes,  it came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system. It now plays a central role in the management of balance of payments difficulties and international financial crises.   Countries contribute funds to a pool through a quota system from which countries experiencing balance of payments problems can borrow money. As of 2016, the fund had about $666 billion. – Wikipedia]  

Welcome to Davos – 2019….also known as the WEF – World Economic Forum – it is 4 days, 3000+ world leaders/bankers/analysts/and commentators all around 1 conversation and that conversation is “Globalization 4.0: Shaping a New Architecture in the Age of the Fourth Industrial Revolution”   Expect to see every major cable business program conducting interviews with all the paparazzi…. Leaders from all over the world will be there – except Donny…..Donny cancelled the trip based on the gov’t shutdown – so the delegation is being led by none other than Treasury Secretary Stevey Mnuchin.   Expect to be inundated with interviews, programming and thought leadership in the days ahead…..as the key discussion point is supposed to be around more ‘inclusive capitalism’. But – considering that all of these people are in the same place all at once - expect to hear news anchors quizzing participants on the state of the global economy, thoughts on BREXIT, on China, and on the ongoing battle between the US and China over trade and what that means in the days and weeks ahead.   None of which has to do with the ‘New Architecture in the Age of the Fourth Industrial Revolution’. 

Overnight – global mkts are weaker…..Asian mkts began the day mixed and ended weaker, European mkts are weaker and US futures are under assault…..….. Comments by both the IMF and  President Xi Jingping about the slowing Chinese economy is clearly at the top of everyone’s mind now that they are all together.   ‘Black swan’ events vs. the ‘grey rhino’ events are making the headlines …….OK – so let’s define that:   a black swan event is an unforeseen event that can cause swift and lasting damage while a grey rhino event is the elephant in the room – it is an obvious threat that everyone is ignoring.  In this case the grey rhino is the slowing Chinese economy – I mean it’s out there, you can see it – so what do you do about it?  The black swan event is the impact (not known yet) of a continued and contentious US/Sino trade war…….causing angst in the mktplace – but if the trade war gets settled then the black swan turns into a White Swan and Boom…..all this fear goes away and Risk Off becomes Risk On and the algo’s will go wild. 

Toss in the news from the IMF and that only adds fuel to that fire as every news outlet is latching onto the ‘negativeness’ of that story.  And then we get Martin Gilbert on the center stage (in Davos) and he says that “We’re in a worse place than we were one year ago” and BOOM!  The algo’s eat it up…..so who is this Mr. Gilbert?  He is the Co-CEO of the British asset manager – Standard Life/Aberdeen.  Just fyi – they manage about $800 bil – so when he says something that negative – on a day when all the headlines are negative – what would you expect the mkt to do – Rally?
Remember – when the tone turns negative – then anything that supports that tone is moved to the front of the line and the issues that had a positive spin last week suddenly have a negative spin today…..
Japan – 0.47%, Hong Kong – 0.70%, China – 1.33% and ASX – 0.54%.  

European mkts didn’t have a chance as the opening bell rang across the continent……the negative news out of Davos, the latest Chinese macro data, the black swan/grey rhino talk, BREXIT and global interest rates all impacting the mkts…..and while nothing has really changed from last week – it is the tone of the conversation today vs. Friday - besides the fact that the mkt needs to test lower to make sure that the recent move up is justified…..(see top of note).   FTSE – 0.43%, CAC 40 – 0.30%, DAX – 0.22%, EUROSTOXX – 0.21%, SPAIN – 0.17% and ITALY – 0.50%. 

US futures are off 19 pts testing 2650…again – don’t be surprised after the recent push higher last week for the mkt to move lower to test support.  I expect the trading range to be 2625/2700 for now.   Earnings season is now in full swing…..look for CELG, PLD, HAL, SWK, WYNN, JNJ, and TRV this morning before the bell and look for IBM, IBKR and COF after the close.    Eco data today includes: Existing home sales – expected to fall 1.5%.  Later on in the week we will get the Richmond Fed Survey, Construction Spending, New Home Sales, Factory Orders, Durable Goods orders – ALL EXPECTED TO BE STRONGER.  Just sayin’ – Accentuate the positive!  Wednesday brings us monetary policy decision from the BoJ (Bank of Japan) and Thursday will bring us a policy decision from the ECB (European Central Bank) – pay attn to the ECB statement considering that Uncle Mario (Draghi) did make comments last week about continuing stimulus in light of the disrupted BREXIT negotiations. 

Oil drops over 1% - losing 78 cts to trade at $53.02...do I need to remind you of the negative tone today?  China, IMF, Davos, etc… all stoking concerns about global growth and what that means for demand.  Recall last week – oil rallied nearly 7% up and thru resistance at $51.50 on production cuts and a healthy global economy….but today – the global economy is once again under siege and so – the trader types are taking $ off the table and ringing the register and like the S&P – $51.50 which was resistance is now support – so do not be surprised to see oil test it as well…..if we hold there then I would suggest that the new range for oil is $51.50/$55.  Again – the world is awash in oil…..while OPEC cuts production, the US increases production – supply is NOT the issue at all and in my opinion -  demand is not waning.  It feels like we are at equilibrium – so why should the price rise or fall significantly from here – right now?   Once we strike a deal with China – then the global economy will be good and demand will increase and boom – it will be off to the races…but until that happens the oil mkts will remain in check.