Stocks – Sector allocation provides some light
Hidden within plunging stocks we find it very interesting to observe that a sector rotation is taking place (relative breakout in Technology/continued strong performance in Discretionary) advocating that the financial business cycle slowdown is very close to its nadir, and thereby suggesting that investors do find some light at the end of the tunnel – not least encouraged by historic cheap money and unprecedented fiscal rescue packages and public intervention to reinstate credit creation. Still, with terrible macro statistics and the risk of nationalisation in some Western businesses the enormous free cash ratios held by fund managers remain closely protected. Now, with benchmark bourses falling relentlessly we are approaching the next selling climax which will give room for the next recovery. That next recovery must be “unusual” compared to the whole bear market if it is to confirm that a long-term low-point has been seen… as forewarned by the global stock sector rotation.
Bonds – BoE shows leadership
Fortunately, Bank of England is showing leadership by implementing quantitative easing and immediately starts buying Gilts to be paid for with new unsterilized money (6% of GDP or a relative equivalent of Fed buying $700 bn of Treasury bonds!). Fed is still hesitating while ECB continues to live in another dimension unobservable to outsiders… intensifying the immense pressure on a sinking European Titanic real economy. Ultimately, if ECB isn’t better informed than us about the resistance of the European economy something has to give in (ECB or the euro currency?). Overall, we maintain that long government bond prices are likely to oscillate between the current fashion of the two dominating themes: 1) global economic growth fear and dovish central banks i.e. bullish and 2) enormous bond issuance with the fear of a major bond bubble i.e. bearish. Therefore, with no firm confirmation that the global financial and economic business cycle passed its nadir and bonds overall in trading ranges the recent BoE initiative appears to support our perception that underlying bond buying pressure remains intact!
Commodities – Historic large short copper unwind
As is evident from our global stock sector rotation analysis recent investor allocations are now suggesting that the financial business cycle slowdown is very close to its nadir. Combining this with recent months’ general ranging activity in commodity prices those investors holding speculative short futures positions are under intensifying pressure due to non-performing investments. This is not least evident in copper where a historic large short position is apparent… while the copper price last week broke to new recovery highs; hence a further recovery in copper prices is very likely.
Currencies – ECB hesitates and USD broken to new highs
BoE will now print lots of new money (6% of GDP) while our conservative ECB is in a high-stake gamble with the European real economy and the USD index last week broke to new recovery highs. This could easily see an extension of the weakness in SEK and CEE currencies for yet another week. However, with the rotation in global stock sectors (see Stocks) suggesting that the nadir of the financial business cycle is getting closer it won’t take mush to ignite a risk appetite revival. Still, a tradeable signal will not occur unless e.g. EUR/SEK plunges below 11.3850, EUR/PLN below 4.5565 and not least EUR/USD breaking back above 1.2992. Keep close attention.
Bullish rotation by early cyclicals or market is selling also defensives?
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