"You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven't been able to do it. Maybe somebody else can."
--Alan Greenspan
Far East Uncertainty
Yes, "earnings season" has kicked off. The season really gets into the next gear this week, as many high-profile corporations (including 26 S&P 500 names) go to the tape with their quarterly numbers. True, we'll hear on monetary policy this week from the European Central Bank and the Bank of Japan. This all matters, as do Treasury yields, currencies and commodity valuations. There is more under the surface.
Today's story begins in China. The land with the dynamic past, as well as the uncertain future.
China's National Bureau of Statistics released a series of headline-level macroeconomic data while you were watching "Game of Thrones" last night. Most importantly, China scored (at least they say they did) annualized growth of 6.9% for the second quarter, which beat expectations and matched first quarter performance. Is that all? Not even close. June Industrial Production printed at 7.6% growth year over year. Huge. This equaled China's strongest month in those terms since December of 2014. Retail Sales? Strongest since December 2015. Fixed Asset Investment for the moth of June beat expectations, as well. Wow. China seems squared away. All good, right?
Well, not so much for Chinese equity markets. Weakness in Asian markets overnight was really confined to Chinese markets, with the Shanghai Composite rallying hard to finish 1.4% lower. High-level meetings ended on Saturday in Beijing that put together a cabinet-level type of committee that will be known as the State Council Financial Stability and Development Committee. The purpose of this group will basically be the coordination of information among regulators, possibly with the People's Bank of China (China's central bank) at the top of this new food chain.
Basically, you have the expectation that greater regulation -- or at least a better-informed ability to tighten financial control from the top -- could be just around the corner. There were also a spate of small-to-mid-cap Chinese corporations that warned on guidance on Monday morning. In review, you have corporate warnings, and you have fears of a financial crackdown -- despite the PBOC's liquidity injection of 140 billion yuan into the interbank market on Monday, which did alleviate the selloff. You did have very strong export data for June, but also looming tension over trade with the United States. Obviously the steel trade may be part of that, and oh, by the way... talks between the U.S. and China commence this Wednesday. Hmmm.
Portfolio Cocktail
Anyone else love watching the relationship between Treasury yields and the tech sector? Maybe you could say the inverse relationship between consumer-level inflation and the tech sector. Giddy up. The Technology sector SPDR ETF ( XLK) roared last week to a 3.4% gain, easily making the sector the week's hottest. The correlation between yields and financial sector performance has always been front and center, but so has this force that continues to give growth stocks a nod.
Unfortunately, it looks to me like we will have to expose ourselves to both worlds, as there is no obvious path forward. Financials had found support in recent weeks due to rising yields and a successful round of the Fed's stress tests -- which allowed dividends and corporate repurchases to muscle up across the group. That trend in yields reversed somewhat after Janet Yellen's dovish testimony last week, followed by Friday's macro massacre.
Data released by EPFR Global showed that investors pulled $730 million from broad U.S. equity market funds in the week ended last Wednesday. Pay attention here. That composite withdrawal disguised inflows of $513 million into funds that focus on the financial sector, as well as $335 million that flowed into funds focusing on the tech sector. How interesting is that?
The FOMC's intent is as clear as a bell. That said, so is reality. The Fed has tightened into weakness. Either that, or they have caused the weakness. Six one way, half a dozen the other. It does no good to throw blame around. We still have to find a way to end the day/week/month with a few more bucks than we started with. The folks under your roof are counting on you.
The Fed's intended trajectory on policy cannot be discounted just because it is not supported by the data. If they're scared, they'll act. You will need broad exposure. You will have to do enough homework to pick quality (quality bounces), or to at least understand what speculation is when you do go there. Do not be afraid. This can be both fun, and intellectually challenging. In all honesty, is that not why we bring it every morning? Two fists, gang. Be alive.

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