MEGACAPs Safe Haven Again

CRE in trouble

What has been an obvious trend, the MEGA8s have been the safe haven recipients of all the risk off capital going on in the overall equity markets, FX markets, and global bond markets. We highlighted this rationale recently and most notably because government bonds are no longer the defacto “safe haven.” We truly feel this is both obvious because of the nature of indebtedness, but we also know corporations cannot simply print money much like the US or China for that matter can.

Now this doesn’t change the facts of this wealth transfer, so don’t misconstrued what we are saying. This current trend of MEGACAPs being the safe haven will continue, well, till it doesn’t. We know for now that it is indeed the case and if the FRB continues to keep rates higher for longer, the investing community will continue to plow the money into these safe havens and abstain from supporting government bonds.

Yes the US Govt has massive amounts of debt, however they also have the Federal Reserve! We have shown our readers the net interest costs of the US Govt. which now stands at a staggering $1T a year when the corporations are enjoying a much less interest expense due to the low borrowing rates during the ZIRP period.

So we get the gist of why global investors are all funneling into MEGACAPs and we agree with this premise…for now, but that will change and that change will come when we get our final 2 pillars to fall. Those pillars are a negative Non Farm Payroll and a reversal of the higher for longer coming either from soft rhetoric or a direct cut itself from the FRB.

What we saw today was a continuation of this safe haven trade and its evident in the Nasdaq vs the SP500:

Source: CQG, Magnelibra

It is also very clear in this MEGA8s overall chart:

Although with this chart, we don’t like the lower RSIs as this group moves higher, tells us this move if reversed will lead to fast selling.

When we look at the bond market today, we can also see evidence of continued selling in the complex as the market saw broad based selling in the cash markets:

We know China is a big FORCED seller and we can only imagine this is well deserved considering the massive amounts of M1 they have deluged the market with over the past decade. This monetary printing is clearly evident in this chart:

However the flipside of all this printing has put continued pressure on the Yuan and rightfully so, falling 16% so far this year:

We suspect the selling of US treasuries is to support an orderly devaluation going on in the Yuan. Like we said, the selling is forced and this is why…

Another market we want to look at is the energy sector especially Crude Oil. We talked about the $85 level and we are firmly above and we do not anticipate sellers here until we get up to $94/$96 area:

Source: CQG, Magnelibra

Crude continues to see fundamental support as drawdowns in the oil reserves coupled with ongoing global output cuts are a fine recipe for higher prices: