It is month and quarter end today, so be careful as there are bound to be plenty of shenanigans. I am not sure if yesterday’s big rally off the opening gap down was purely quarter end putting money to work or not, but the continuing rally this morning definitely seems to have changed the tone of the past week.

http://themacrotourist.com/images/Azure/ESZ4GIPSep3014.png

The reason for the continuing strength this morning is the release of the European CPI figures. Inflation continues to run even lower than the subdued economic estimates. Although the CPI figure came in at the expect 0.3% increase, the core disappointed with an abysmal 0.7% increase versus the expected 0.9%. Disinflation is alive and well in Europe.

In a perverse set of logic, the news that Europe is sinking further into a deflationary vicious circle is actually bullish for risk assets. The market is assuming that this brings us closer to the starting line for European QE. Hence they rush out and bid up stocks.

When I saw the news this morning, I immediately covered all my equity shorts. I was already feeling nervous about yesterday’s action, so that was all I needed to head to the sidelines. I know that the intermediate trend for stocks is down, but I am going to flatten my position and reassess.

I will also ring the register on my HYG and JNK puts. In an environment where I seem to have gotten very little right, I am happy for this win but I feel the time to exit the position is upon us.

http://themacrotourist.com/images/Azure/HYGSep3014.png

I am by no means bullish on risk assets. I still think that there is a disaster looming in the future. But for a little bit, I would like to watch from the sidelines. High yield and junk bonds have really gotten hammered during the past couple of weeks. It wouldn’t surprise me at all if these levels hold and we grind higher for a bit.


Sub-mergin markets

Yesterday the emerging markets were pounded especially hard. With bad news out of Brazil and Hong Kong, the EEM gapped down below its 200 day moving average.

http://themacrotourist.com/images/Azure/EEMSep2914.png

Contrast that to the S&P 500 which is no where its 200 day moving average.

http://themacrotourist.com/images/Azure/SPYSep2914.png

In the past I have highlighted the divergence between EEM and copper. This latest swoon in the EEM has done a lot to correct that imbalance.

http://themacrotourist.com/images/Azure/EEMHGSep3014.png

I am running late this morning, so I am going to sign off early.


Positions

http://themacrotourist.com/images/Azure/PositionsSep3014.png</p>