So after all that hype and weeks of build-up, are you as disappointed as I am? FOMC Minutes, Greek debt extensions or the very lame Neil Patrick Harris, the let-down is the same. At least in Europe you might see the finance minister of Greece start a fist fight. The Fed continued its policy of non-enlightenment while the Syriza party pulled back from the brink of the abyss and went back to Frankfurt with their begging caps in their hands. Everyone is focusing on the big win by the S&P 500 this week that put it to a new high, it was the announcement that Greece have caved in on most of their demands that gave the market the boost it needed and my preferred European etf (which I am currently long) still managed to strongly outperform on the week. While the Yinzer Analyst is wondering if he can pull a Harry Crane and ride one good idea to wealth and fame, the strong performance by European funds (especially the unhedged variety) has me wondering if a bigger change is about to come to the market.
Starting off here at home, it was another big week for the S&P 500, not only setting a new high but breaking through recent resistance in the process. For me, the big question is how convincing of a move was it? The market was flat on the week heading into Friday and it was only on the rampant speculation of an impending deal with Greece that gave it the spark it needed to close about the 2100 level and even then it was on weaker volume. While the weekly CMF score rose on a close just off the high, momentum hasn’t confirmed the breakout. Janet Yellen’s testimony this week could be what it takes for resolution one way or the other.
Investors look for resolution from the FOMC will have to wait till March as the release of the meeting eventually rise, yes but the FOMC is on a “data dependent” path which means the chances of them sending YOU a big signal in their commentary is pretty low. After a brief one-day pop on Wednesday, TLT struggled for the rest of the week but managed to close outside the downtrend channel and above prior support. The question now is can it stay there?
The real excitement this week was in Europe where the complete abandonment of the hardline stance that dominated their election platform by the Syriza party was met by a resounding chorus of “I told you so” by literally everyone everywhere. At least that’s how it seems but hindsight is 20/20. While volume dipped this week, the iShares MSCI EMU index had another strong week and pushed right into the 50 week moving average. Negotiations between the troika and Greece will continue on Monday and if a deal can’t be reached another meeting of the ECB finance chiefs will take place Tuesday. Volatility will be the order of the day.
Now what really has me interested is what happens later this week after we have a six-month extension in Greece and Janet Yellen magnificently demonstrates the ability to answer questions without saying anything. After the rout in Treasuries this year I think you would be hard put to find anything as potentially “overvalued” as the U.S. dollar. Thanks to a combination of factors including the winding down of QE3, existential uncertainty in Europe and higher risk-free rates, Uncle Buck enjoyed a hell of a run in 2014. Here I’m using UUP and FXE but it’s hard to find a currency the dollar didn’t decimate last year.
But what’s interesting to me is that regardless of when the debate over when rates might rise first heated up here at home, Uncle Buck really began losing steam on February 1st, the first trading day after GREK hit its lowest point following the election that brought the Syriza party to power. February 1st also marked the day that the January Treasury rally finally cracked as the S&P 500 bounced at 2000 and the risk on/off switch decisively switched to “on.” Besides Treasuries another casualty of the risk on trade has been the U.S. dollar which of course means that the Euro (and most other major currencies have been gaining ground) versus the buck.
Now my inner conspiracy theorist says that Janet Yellen and the rest of the Fed are of course secretly thrilled by this. The major increase in the dollar has dampened inflation even as the domestic economy showed signs of heating up, putting the Fed in an unenviable position. Do they raise rates even though GDP growth is likely to only be in the 2.5% range and while the global economy continues to sputter or do they risk higher inflation down the road? If the dollar continues to lose ground and commodity prices begin to stabilize, personal consumption expenditures will likely weaken as real disposable incomes stagnate but the Fed won’t have to pull the interest rate hike trigger in the near future. As much as the Fed hates the current status quo, I think it’s just as terrified by the thought of what could happen when interest rates finally do rise. They don’t want to repeat the mistakes of European leaders in 2011 when they raised rates prematurely and killed their nascent recovery and helped sparked the crisis of 2012.
So if Uncle Buck does continue to slide, could it mean that commodities might finally be able to stand their ground after so many difficult years? It’s way too early to speculate but now that every institutional investor has stripped out their commodity bucket and dumped it into U.S. equities, who’s left in the market? Could we see the beginning of a new bull cycle?
Now it’s time to get back to the Oscars and see if Neil Patrick Harris can finally land a joke. Good hunting out there tomorrow.