Bull Marco Report

Here’s the bull macro report I wrote for my class of portfolio management.

Past week events
15th October – Germany ZEW Economic Sentiment at -22.8, better than the -27 estimated
15th October – China New Loans at 1.690B Yuan, better than 1.350B Yuan estimated
16th October – United States Retail Sales YoY at 4.1%
17th October – U.S. Building Permits at 1387m, better than 1340m forecasted
24th October – ECB left deposit and marginal lending rate unchanged at -0.5% and 0.25%
25th October – Germany Business Expectations at 91.5, beats forecast at 91
Upcoming week events
29th October – U.S. Consumer Board Consumer Confidence, expected at 127
29th October – Pending Home Sales MoM, expected at 1.7%
30th October – U.S. GDP QoQ Q3, preliminary, expected at 2%
30th October – Bank of Canada Interest Rate decision
30th October – U.S. FOMC Statement and interest rate decision
31st October – BOJ Monetary Policy Statement
1st November – U.S. Non-Farm payrolls, expected at 105k
1st November – U.S. Unemployment Rate, expected at 3.6%
1st November – ISM Manufacturing PMI, expected at 48.4
7th November – Bank of England Interest Rate decision
During the first week of November all PMIs will be released, both manufacturing and
services as well as composite.
Highlights from Bull Macro Report
● Strong liquidity provided by the FED, bullish for stock market as BofA notes
● Consumers are strong and ready to spend money, Amazon latest earnings gives us a
clue
● Sentiment is broadly bearish according to AAII, this is a buying opportunity window
● Banks are expanding their balance sheets, bullish for the economy and stock market
● First divergence between regional surveys and ISM, the latter will pick up soon
Despite the top news provide negative outlook for the stock market in the past months, there is a substantial upside potential in the equity market. There are strong reasons to be bullish on the US stock market and I will point out the top ones.
First, the main driver of market is liquidity and as we can see in the following chart the proxy of global USD liquidity provided by Bloomberg has no sign of weaknesses.

If we add to the mix the current repo operations conducted by the Fed, liquidity will continue to flow in the market pushing stock prices higher. The Fed balance jumpt by more than 100$ billions in the past weeks and it is expected to continue in this direction until the repo rate does not come back into the Fed target range. Furthermore, BofA estimates that the US
central bank balance sheet will continue to grow in the upcoming months reaching 18 trillion dollars by mid 2021. If we add the easing that will be conducted by the ECB since the 1st of November the market bias is bullish.

As a second point, the manufacturing sector is slowing down globally but the top engine of the world, US consumers which account for 70% of US GDP, are still in a strong position.
Consumer confidence is at all time highs and the Bloomberg US Weekly Buying Climate
Index shows that US consumers are ready to go shopping. This trend is confirmed by both retail sales YoY and e-commerce sales, the former has a 4% YoY in the last three months while the latter is up 13.3% compared to Q2 of 2018. This trend can be seen also in the
Amazon latest earnings release, where sales in North America were up 24.2% compared to a year ago, at 42.6$ billion.

With regards to market sentiment, it can be tracked by the AAII, which stands for American Association of Individual Investors an association that covers over 150.000 investors sentiment, it is extremely bearish. This level of bearishness always concise with market bottoms, thus we are in buying opportunity window.
If we take a look at put/call ratio index of CBOE, we can clearly see that the bias of
investors/traders is still bearish; the 20 weeks moving average is still at high levels compared to the historical threshold of 1.050.

Lastly, looking at the banking side of the economy, banks are expanding their balance
sheets and providing credit to the economy as we can see in the following charts:

Moreover, we are seeing a first divergence between the regional surveys and the ISM
composite PMI, this suggests that a pick up in the ISM composite is likely soon, which is positive for the stock market.

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