Enis’s Macro Wrap – Don’t Miss the Forest from the Trees

by Enis July 18, 2012 7:56 am • Commentary

Markets were quite resilient yesterday following the Bernanke commentary.  It reminded me of the initial reaction to the FOMC announcement on June 20th.  Prior to that meeting, there were some who expected a QE3 announcement.  When the Fed only announced an extension of Operation Twist, Dan, CC, and I thought we’d see a quick sell-off of risk assets.  That was the initial 30 minute reaction, before the market rallied to up on the day, and left us scratching our heads.  The market proceeded to sell off 50 handles over the following 3 trading days.

I’m not predicting the same, though it wouldn’t surprise me either.  I bring up the story because I received a lot of questions as to why markets did not sell off after Bernanke’s commentary yesterday.  The scenario that I view as most likely for the market over the next few weeks is a move lower into the next FOMC meeting on August 1st, at which point I think the Fed will signal that QE3 is likely at the Sept 13th meeting.  I think the deterioration or lack thereof in Europe over the next couple months will determine whether QE3 will be enough to support the market against broader macro headwinds.

Speaking of Europe, the European banks have quietly inched back to near their lows of the year, only 5% away after another down day today.  Spanish and Italian yields are up again this morning, with Spain at 6.85%, not far from this year’s highs.  Ignore Europe at your own risk.  Asia was broadly lower overnight as well, with the Hang Seng down 1%.  The dollar was stronger, and commodities lower.  I continue to hold the SLV Jul 27 puts, and will of course post immediately when I close that position.


Bernanke will be in front of Congress again today to answer more questions.  Mixed bag of bank earnings so far, with weakness from PNC, vs. strength in USB, and a messy report from BAC, many pluses and minuses.  Continue to watch defensives vs. cyclicals behavior.  XLV, XLU, and XLP are all at multi-year highs, which is the main reason why the SPX acts strong. The market is not as strong under the surface.