Global Equity Divergences, Job Market

Today at 8:30 EST, initial jobless claims was released showing a much better than expected number of 365k vs a forecast of 375k. This was the first beat for April, lessening fears of a slowdown in the job market, as the recent jump in claims could most likely be due to the Easter effect (seasonality). As of the time I am writing (9:00) the futures have pulled back from their initial spike higher, and look to be rotating lower. Tomorrow the unemployment report is released and so I do no expect to see heavy movement in the markets until then. Given the previous misses in claims and yesterday's ADP report, most traders are probably expecting a lackluster report tomorrow, and so an upside beat should bring more surprise. Currently I am slightly bullish risk on assets, but am extremely nimble as U.S. equity is on thin ice. I remain bullish however because U.S. equities have been known to rally much further than anticipated, even with weak technical structure (QE, Fed support). U.S. Equity has been the best performing stock market of the year (not including volatile, smaller markets), and has been puzzling traders as to why. The reason is both good and bad for the near future. The main reason is, in such a low interest rate environment, investors must put there money in riskier assets, and right now, the U.S. equity market seems to be the safest place in the world vs. Europe's debt situation and china's slowdown. This is also a bad thing for the market as divergences like this can't hold out for much longer. Either we are going to see global equity markets pick up, or U.S. equities are going to break down, to reflect global fears. The best reward to risk trade would be for a breakdown in U.S. equities, and so purchasing volatility as a hedge, may be a good idea at this point.

The above 4 charts are equity market of the United States, Germany, Brazil and Spain in that order. Notice the huge discrepancy between global markets and U.S.. This is due to recent global fears, and these structural divergences can't hold up for much longer. This problem is not just reflected in global equity, but it has also been seen in commodities (oil hasn't been moving to highs) and in individual stocks and sectors, specifically the energy sector has been failing to move to highs.

Julian Marchese