A Note From Brigden

Here is a COPY from a  PDF file from Julien that they have offered me for Free in exchange for my Pro Charts on the S&P500 (Futures and SPX) and Crude as well as the Russell, which they feel is worth watching.

Good commentary.  Another one is attached from my Pal, Garret.

Dave

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contained herein is the sole opinion of Macro Intelligence 2 Partners LLC. This research has been prepared by Macro Intelligence 2 Partners LLC using information sources believed to be reliable.
Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. It is intended for
the sole use by professional investors to whom it has been made available by Macro Intelligence 2 Partners LLC. The delivery of this report to any person shall not be deemed a recommendation
by Macro Intelligence 2 Partners LLC to effect any transaction in any securities discussed herein.
Europe Stocks: 2 Quick Charts

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30th January 2017
In late 2014, as market speculation built that the ECB was finally ready to join its peers and launch QE, investors hoping to repeat the windfall profits they’d made off the similar moves by the Fed as well as the BoJ, poured cash into European stocks. The ensuing rally was helped by European bond yields that were pinned to the floor by QE and NIRP, as well as a Euro that had fallen steadily and was sitting at 1.05. Yet, as the DAX powered towards a six month gain of almost 50% in April 2015, cracks started to appear and the markets quickly destabilized. First, all this reflationary price action proved too much for European fixed income and Bund 10yr yields jumped over 70bps in a month eventually hitting 1% at the start of June. Second, despite the fact that Treasury yields also rose, the differential to Europe narrowed over 30bps, which in turn triggered a sharp bounce in the EURUSD to almost 1.15. For the relatively high yielding, export sensitive DAX, higher rates together with a stronger Euro were toxic and by August the index had fallen close to 25%. So, why is all this relevant today? With the DAX almost back to its highs, European bonds vulnerable to a rapid spike in inflation (“MI2 Trader: European Inflation” 27th Jan) and the Euro liable to respond to the rate differentials, we can’t help but wonder if we are standing on the edge of a spring 2015 Redux?
At the end of last year, we suggested that as the ECB moved to acknowledge the ongoing growth and reflation in the Eurozone, European stocks and especially the banks, would benefit from a gradual steepening of the yield curve (“MI2 Trader: Eurozone Equities” 7th Dec). However, as you can see, since then there’s been over a 11% jump in the market cap of the Eurozone equity market vs. less than half that in the US. Although the European market is still 5% below the level suggested by the ECB’s balance sheet, it’s this relative performance that has us concerned.
Warning: No reproduction, transmission or distribution permitted without consent of Macro Intelligence 2 Partners LLC. Unauthorized review, dissemination, distribution or copying of this message
is strictly prohibited and could subject you and your firm to liability and / or substantial fines and penalties. If you would like clarification please contact gretchen@MI2partners.com. The material
contained herein is the sole opinion of Macro Intelligence 2 Partners LLC. This research has been prepared by Macro Intelligence 2 Partners LLC using information sources believed to be reliable.
Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. It is intended for
the sole use by professional investors to whom it has been made available by Macro Intelligence 2 Partners LLC. The delivery of this report to any person shall not be deemed a recommendation
by Macro Intelligence 2 Partners LLC to effect any transaction in any securities discussed herein.
That’s because, as we wrote in the spring of 2015; “history suggests that whenever returns on the DAX have exceeded those of the S&P (white line over orange) by a significant margin, it’s ended up with a true crash…. therefore “if Bund yields and especially the Euro continues to move higher watch out” (“3 Quick Charts” 13th May 2015). Since 2015, we’ve refined the graph a little by adding the spread differential, i.e. the difference in normalised returns below, to get a sense of when we are hitting that “significant margin” of DAX outperformance. What it suggests is that once we hit that white dotted line, which we’ve just done, extreme caution is warranted. Yes, it’s possible that, driven by a continued acceleration of the robust data of the last few months, the DAX continues to rise reaching truly astronomic levels as it did in 2015. It’s also possible that as we saw in 2010-11, we enter an extended period of sideways price action.
However, the risk is that as in 2015 “ultimately the rising Euro and rates kill the rally”. When we wrote that on the 7th December, that was still the “second derivative and first we need to see stocks rally”. Well that scenario has now panned out. Hence it is incumbent upon us to simply point out that we are at levels, where history suggests the odds of a European equity correction are rising. An outcome, which will become even more likely, if we are right and higher bond yields driven by inflation, fuel a sharp jump in the Euro.
P.S. While, with the exception of the GFC, the DAX always corrects harder than the S&P (orange arrows) a sharp correction in Europe would be expected to drag down the US market.