June 22 Markit releases its preliminary manufacturing, services, and composite Purchasing Managers’ Index (PMI) data in the U.S. and the eurozone. This is a vital gauge for judging the state of global growth. began to show signs of weakening. Data in Germany (Europe’s largest economy) and the eurozone told us growthwas slowing. This rallied the dollar whileweighing on the euro. It had a negative impact on the S&P 500 due to concerns multinationals would see sales slow abroad. The conversation changed mid-May, heading into the Fed and ECB’s policy decision announcements. Fed governors speaking intra-meeting said they were willing to let inflation run hot before adjusting their rate- hike thinking. ECB governors said intra- meeting they could end asset purchases in December. This turned the tables from a currency perspective. The dollar tumbled and the euro rallied, once again boosting markets. The Fed became more hawkish. It said it sees the path of rate hikes for this year rising from three to four. This was more than the market was expecting. The ECB became more hawkish, but with a twist. It said it would end asset purchases but would not hike rates before September 2019. Instead of the dovish Fed statement and the hawkish ECB statement the markets were anticipating, they received the opposite. The dollar rallied and the euro dropped, but the market, well, that remains to be seen... That was until this week...
The market dealt with multiple major catalysts, including the G-7 heads of state summit, the North Korean summit, the AT&T/ Time Warner ruling, and the Bank of Japan’s policy announcement. But the key events were the policy announcements by the Federal Open Market Committee (FOMC) and the European Central Bank (ECB). Late last year, the S&P 500 Index had been a beneficiary of a weakening dollar. The index is laden with many U.S. multinational corporations. These companies make up 47% of the index’s revenues. The natural conclusion is that when the dollar drops, it should improve their sales as the cost of buying their goods and services becomes cheaper abroad. However, several big hedge funds latched on to an inflation-related short call in February. They were Citadel, Tudor Asset, and Bridgewater. Between the three of them, they manage roughly $216 billion. When you consider that many hedge funds leverage by a multiple of two to three times, that’s more like $432 to $648 billion. In other words, it can have a lot of market impact. These three promoted the “inflation is on the rise so short the stock market” call early this year. They pounced in late January when wages data rose. They said this was the first sign. Then, they jumped on the Fed when there was a change at the helm. They said new Chair Jerome Powell was more hawkish (inclined to raise rates) than his predecessor. The data kept supporting their cause.
EDITORS
Scott Garliss
John Gillin Greg Diamond
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At the same time, European growth metrics
American Consequences 13
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