We Trade In An Aquarium, Not Open Seas: Global Week Ahead

We live, work, invest and trade in an aquarium, not the open seas.

What do I mean by that? Central authorities heavily manage the global economy.

The faulty idea that investors are cast adrift out on the turbulent open seas of a global economy is not the right concept. The world economy can be managed and is indeed managed -- heavily. For example, to start this global week ahead, global oil prices are on the ascent for a 3rd consecutive day.

OPEC is one of the central authorities I am talking about:

To address a recent slump in oil prices, the OPEC oil cartel says it will meet informally next month. Lo and behold, West Texas Intermediate (WTI), the major U.S. oil benchmark, climbed above $42.50 a barrel on Monday. Oil briefly entered a bear market only last week, when prices dropped -20% after hitting 2016 highs of $52 in early July.

In January and February, the Financial Times shared with us that falling oil prices fueled a massive sell-off in U.S. and emerging market junk bonds. Energy companies account for a large part of those high yield bond markets. Average U.S. junk bond yields soared to a post-crisis high of 10.07%. This produced bleak statements -- this asset class was on the brink of a meltdown.

This time, however, bond markets are acting differently.

In this latest oil price bear market, emerging-market corporate junk bond spreads dropped just 81 bps. U.S. junk bond spreads fell 60 bps, this according to Bank of America Merrill Lynch (NYSE:BAC) indices. Even U.S. energy junk bond spreads shrugged it off. Those bond credit spreads dropped just 84 bps.

A correlation seen between oil and US high-yield energy credit spreads broke down. This shows the power of the new central bank corporate QE. Credit markets are remade by QE. They become less responsive to global/macro circumstances.

Here’s an even better example of central authorities I am talking about:

Negative benchmark interest rates -- even corporate bond buying by the European Central Bank and Bank of England -- now provide a new type of global economy fuel. A third of global government bonds have negative yields. A growing pool of corporate debt is headed the same way.

Central banks are driving investors further and further afield in the hunt for yield. This is good news for stocks, too. You might have noticed that recently yourself.

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Innospec (NASDAQ:IOSP) is a $1.4 billion market cap diversified chemicals company with a Zacks VGM score of B. The company is active in fuel specialties, performance chemicals, and octane additives.

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Qorvo (NASDAQ:QRVO) is a $7 billion market cap semiconductor/radio frequency company with a Zacks VGM score of A.

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Key Global/Macro --

After a big +255K July nonfarm payroll report from the USA last Friday, this week looks to be a let down.

A number of central banks announce their latest interest rate decisions (India, New Zealand, Mexico, Chile, Peru, South Korea). None are expected to change the policy rate this time around.

A retail sales report for Mainland China hits on Friday. +10.2% is the expectation, down from +10.6% y/y.

On Monday, industrial production in Germany rose +0.5%, reversing the -0.4% y/y drop that existed before.

In Australia, a measure called Construction Work Done went up +0.6% q/q, helping to reverse a -2.6% q/q fall.

On Tuesday, in Mexico, the Antad same-store sales data should be up +10.5% from a+5.3% y/y reading prior.

The Reserve Bank of India (RBI) announces a new interest rate decision. A 6.5% repo rate is not likely to change.

China’s PPI goes to -2.1% y/y from -2.6% y/y in a prior reading.

The unemployment rate in Switzerland is 3.3%.

U.K. industrial production is forecast to fall -1.1% m/m in July after a -0.5% m/m reading in June. Brexit bites.

Brazil’s broad retail sales look weak at -0.6% m/m in July after a -0.4% m/m reading in June.

The IBD consumer optimism index in the USA should rise to 48 from 44.

On Wednesday, OPEC will release its latest oil market report.

Brazil’s IBGE inflation rate looks to be +8.63% y/y in July after a +8.84% reading in June.

The RBNZ (Reserve Bank of New Zealand) announces its latest interest rate decision.

On Thursday, the Bank of Korea (BoK) announces its latest interest rate decision. The last rate level was 1.25%.

The City of Buenos Aires looks for inflation to rise to 47.2% from 47.1% in y/y terms.

Russia’s advance GDP reading looks for -0.80% y/y from a prior -1.2% y/y reading.

The IEA releases its monthly oil market report.

There is a Banxico (Bank of Mexico) monetary policy meeting. The overnight rate is not expected to move from 4.25%.

The BCCH (Central Bank of Chile) announces its interest rate decision. The overnight rate target is 3.5% currently.

On Friday, the Eurozone GDP growth in preliminary terms should be +1.6% y/y.

Netherlands GDP should be tapped. The last reading was +1.5% y/y. The preliminary reading looks to be +0.5% q/q. In comparison, German GDP growth should be +0.4% q/q. Finally, Greece GDP should fall -1.3% y/y.

Retail sales in Mainland China should be +10.2% y/y from +10.6% y/y.

Proxy GDP growth in Brazil looks to be -3.8% y/y from -4.92% y/y. That is a better reading.

The University of Michigan sentiment index should get to 91.5 from 90.