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Daily Agenda: Signals Suggest Abenomics Running Out of Steam

Euro zone inflation falls further; Brazil and India release GDP data; U.S. consumer data on deck.

Market news overnight remained focused on increased intensity in the conflicts in eastern Ukraine and in Iraq and Syria. With U.S. equity trading volumes at levels that remain well below historical averages for the season, the potential for exaggerated moves due to geopolitical jitters remain high, but yet unrealized. In the face of mounting evidence of a slowdown across the euro zone, the European Central Bank is facing mounting political pressure to take monetary action before winter sets in as natural gas prices spike from to a Russian embargo. Facing a long holiday weekend, the big question for investors remains, what will it take to shake stock market confidence?

Japan releases disappointing July numbers. Industrial production data for July released in Tokyo today registered at softer-than-forecast 0.2 percent growth over June’s level. Separately, consumer prices for July remained in line with the prior month’s reading at 3.3 percent annualized, excluding the volatile food component. Excluding the impact of the new sales tax introduced in April however, prices were up by only 1.3 percent at the register, well below the Bank of Japan’s target. With the Abenomics-driven rebound seemingly sputtering out, speculation of increased BoJ liquidity measures and a government move to delay the second round of consumption tax hikes are increasingly part of the market risk narrative.

Euro zone consumer inflation stagnant. Euro zone consumer inflation levels for August rose at a pace of 0.3 percent, compared to 0.4 percent in July, the most sluggish rate recorded by Eurostat since 2009, according to a report issued today in Luxembourg. Italy’s consumer price index registered a contraction of 0.2 percent year-over-year for the month, the first decline since 1959 — meaning that the euro zone’s third-largest economy is in deflation. Separately, euro-zone unemployment for July registered unchanged at 11.5 percent. This latest round of weak data has only intensified the political pressure on ECB president Mario Draghi to take action at the next meeting of the bank’s policymaking group on September 4.

U.S. July consumer data is on deck. U.S. July personal consumption expenditure (PCE) data due today will be a focus for analysts today, with forecasts for spending to rise 0.1 percent month-over-month after a prior 0.2 percent, income at 0.3 percent month for the month after 0.4 percent and the aggregate index to come in at 1.6 percent year-over-year. Separately, revised University of Michigan consumer sentiment data for August is also set to come out today, with forecasts for a drop to 80.4 from earlier estimates of 81.8.

Emerging-markets GDP data out for release today. Macro data for key emerging markets is due for release today. Consensus forecasts suggest a divergence in gross domestic product growth for India and Brazil. Increased manufacturing data released in recent months has sparked hopes that the reforms instituted by Indian Prime Minister Narendra Modi have helped expand growth with consensus forecasts for an annualized pace of 5 percent for the second quarter versus a prior 4.6 level. Brazilian growth levels for the period are expected to register the first quarter-over-quarter contraction since 2009 lead by declining production and investment.

U.S. grain prices rise. Wheat futures have seen an increase price per contract for four consecutive sessions in Chicago as of this morning, with geopolitical concerns sparking speculation over export demand. Ukrainian grain producers may experience delayed harvest activity due to the escalating Russian incursion; other Black Sea grain producers, such as Turkey, experienced bad weather earlier this season. Chicago Mercantile Exchange Wheat prices still remain well below highs recorded last year.

Portfolio Perspective: Fear driving "least fun bull market" of past 35 yearsTim Dyer, Sage Capital Advisors

Investors have long known that both fear and greed drive market prices. What many fail to see however, is that emotions are usually a counter-trend indication.

To quote Mike Shell, president and CIO of Knoxville, Tennessee–headquartered Shell Capital Management, “Investors often get overly optimistic after prices have trended up and investors get more afraid after prices have trended down.”

So, while the bull market for U.S. equities has extended with strength into its fifth year, many people have remained on the sideline. This is because of the proverbial black cloud that seems to always be looming over their shoulder. Fear of the next big drop like the 2000 dot-com bubble and the 2008–’09 financial crisis.

I recently returned from a large conference of asset managers. One panelist said, “This is the least fun bull market of their careers.” This was a recurring theme across several panels. If these guys have missed out, what about the regular guy that doesn’t have hundreds of research analysts scattered across the globe?

Looking closer at a sentiment index provides a possible answer. Such a gauge indicates that fear is a driving force in this market. This is the same market environment where, if you haven’t noticed, U.S. large cap equities are hitting all-time highs.

The point is, just because someone feels or predicts the “next big” crash is around the corner doesn’t mean that it is. A lot of people that missed the party are now looking for a correction to justify their inertia. Markets inhale and exhale in normal cyclical fashion until they reach extremes. Historically, when investor sentiment has been leaning towards fear, sticking to your guns and holding winning positions has paid off.

When money managers, the media and the investing public starts to gloat about record highs and strong market momentum, it may be time to put the hedges on and take some profits.

Tim Dyer is a managing director at Sage Capital Advisors, a La Jolla, California–headquartered asset management firm.

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