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The Weekly Track locked-and-loaded

- The Weekly Track – Locked and Loaded? by Bob Savage
http://track.com/articles/the-weekly-track-locked-and-loaded/

The fear of war is almost impossible to model for markets. This was the biggest driver of the last week even though we ended Friday with some hope that it will all be about words before diplomacy rather than bullets and bombs. While many are already tired of North Korea as the excuse for the global equity market correction, there are few other good explanations other than the more mundane position arguments that leave many still rotating risks hoping that a game of hot potato will come up with a fuller return than a missed meal or worse. The sad violence from Virginia is unlikely to help support markets in the US as it underscores the sharp divisions between inclusion and diversity against economic stagnation and fear. There is clearly a jump up in risk in the last week but the dispersion of it was less than in other weeks and the actual S&P500 index VIX rise is less important than some of the other factors that point to trouble ahead – namely credit spreads, momentum an
d rising pain in Emerging Markets. Behind the scenes of markets, there remains doubt about political support for the economy – whether its US Congress and the ability to get a tax reform bill to the President, or labor reform in France or the split of coalitions in Germany as Merkel plans her next and last term as Chancellor, or the Abe chances for re-election or replacement. There is also ugly politics in play first in Venezuela where Maduro foments a revolution, in South Africa where Zuma holds onto power with a slim majority, in Brazil where the broad populist spending stokes fears about devaluation. All things being equal – the ability to look at the price action and say that it expresses much of anything important yet is difficult – particularly because we have such a low base for comparison whether in the VIX or in Gold or in HYG. Markets are watching the short-term trends and hoping that something larger will follow whether that means a 5% S&P500 correction o
r a larger rebound in the USD or some breakdown in US yields. There appears to be little conviction yet that the reasons for last week’s pain will convincingly end the “buy-ever-dip” logic that has dominated since 2009 – leaving more prone to rotation than further selling. Until then, cash on hand will be a burden and eventually go back to work but likely not until we have more clarity on the geopolitical and domestic political concerns at play. While nuclear war was not the first choice – its’ still on the list – and that alone leaves a long tail for many to wait this last month of summer trading out even if it costs some opportunity.