Technically Speaking For July 23
Summary
- The UK has a new Prime Minister. The same problems remain.
- Germany has economic problems; the IMF has lowered growth projections.
- Today the market rallied on good trade news, potentially altering my bearish commentary yesterday.
Boris Johnson is the new UK Prime Minister. Johnson is a do-or-die Brexiter:
Johnson, who was the face of the winning Brexit campaign in the June 2016 referendum, has vowed, “do or die,” Britain will leave the European Union in October.
Writing in Monday’s Telegraph, Johnson said, “it is time this country recovered some its can-do spirit.” He said that if the Americans could land men on the moon 50 years ago using hand-sewn bits of computer code, then 21st century Britain could imagine a way to provide for frictionless trade across the Northern Irish border, which has been one of the stumbling blocks of the Brexit deal.
Despite the rosy tone of the editorial, it's difficult to see how the Brexit issue can be resolved. Teresa May tried several times and got nowhere. The EU has no incentive to offer a more favorable deal lest they encourage other defections. A hard Brexit looks like the most likely outcome.
Germany is in trouble. It is the world's fifth-largest economy and comprises 29% of EU output (France is the next largest accounting for 20%). The annual growth rate has slowed during the last three quarters, printing at 1.1%, 0.6%, and 0.7%, respectively. The Markit Manufacturing PMI rose from 44.3 to 45 in the last report, which is still significantly below the 50 reading used to separate contractions from expansions. The IFO sentiment reading has dropped sharply over the last year. And industrial production has contracted on a Y/Y basis in eight of the last 12 months. On the plus side, the service sector -- like other service sectors across the global -- is in good shape; it's still growing and is mostly optimistic about its economic outlook. But the slowdown in the manufacturing sector indicates that the trade wars have gained traction and are hurting growth.
The IMF released its latest Global Economic Outlook, which was less than encouraging. Weak consumer and business demand has lowered durables sales, which, in turn, has negatively impacted manufacturing and trade. The US-China trade war has also slowed global activity. On the plus side, global service sectors are still growing at a decent clip. Unfortunately, risks are skewed to the downside:
... They include further trade and technology tensions that dent sentiment and slow investment; a protracted increase in risk aversion that exposes the financial vulnerabilities continuing to accumulate after years of low interest rates; and mounting disinflationary pressures that increase debt service difficulties, constrain monetary policy space to counter downturns, and make adverse shocks more persistent than normal.
We've seen similar observations from other trade organizations and various central bankers.
Let's turn to today's performance table:
This was a solid day for the markets. Mid-caps led the market higher, followed by the transports, SPY, and QQQ. While mid and micro-caps also gained, their respective increases were less than the larger indexes.
Yesterday I argued that the markets were most likely headed lower. That assessment was based on two facts: small-caps were selling off and the Treasury market was in the middle of a short-term rally. The basis for that argument has shifted somewhat. Let's start with today's charts:
The major indexes were all higher and had solid rallies. All of them started in the late AM and early PM and lasted for the rest of the day.
Next, let's look at the Treasury markets:
Both the belly of the curve (top chart) and the long-end of the market (bottom chart) gapped lower at the open. They each attempted to move higher afterward, but couldn't maintain momentum, resuming their move lower. Both charts show a very convincing end to each rally.
The smaller and mid-cap charts are a bit more mixed.
The IWM broke through resistance on the last bar of the day. Prices are now above the 200-minute EMA with rising momentum.
Micro-caps, however, are still trending lower.
Mid-caps remain in a trading range.
So, is a rally on tap? I'm unconvinced. Micro-caps barely moved today and mid-caps are still in a limited trading range. There is still a strong bid in the Treasury market and today's move was largely caused by positive news on the trade-talk front -- a one-time event. Still, the move lower argument is clearly weaker as of the close.