Monday, March 23, 2009

Bylov: Inter-Markets Trading View

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Stocks – Just another recovery or…

Following recent new bear market lows in benchmark stock indices a recover has commenced. So how can we be sure that this isn’t just another suckers’ rally? We can’t! A certain amount of evidence still has to surface before we would dare stating that we have witnessed an important bear market low. While some constructive evidence are observable like the recent stock sector rotation towards early cycle sectors suggesting that the financial business cycle slowdown is very close to its bottom and the continuing efforts to provide cheap money, fiscal rescue packages and public intervention to reinstate credit creation we also accept that terrible macro statistics remain a deterrent on fund managers willingness to begin commit the enormous free cash ratios. Consequently, a much strong stock market recovery must occur (e.g. S&P500 above 843) before evidence really mounts that global investors have begun looking beyond the continuing global macro economic damage.

Bonds – No new yield lows regardless of QE

Major central banks like Fed, BoE, SNB and BoJ have all commenced quantitative easing including buying of long maturity bonds. This has been widely expected and hence discounted, but the general lack of clear new yield lows in long bonds remains a concern and probably finds its root in the many concerns related to the long-term implications of QE and the enormous issuance of government bonds. Meanwhile ECB is hesitating joining the others due to conservatism rather than a much better state of the European economy and the banking sector’s ability to create credit… and we’re wondering whether a late ECB decision to commence QE will actually mark a contrarian “sell” signal. Overall, we maintain that long government bond prices are likely to keep oscillating between the current fashion of the two dominating themes: 1) global economic growth fear and dovish central banks i.e. bullish bonds and 2) enormous bond issuance with the fear of a major bond bubble i.e. bearish bonds. Now, with the financial business cycle apparently close to its bottom paying up for bonds holds increasingly unattractive risk/reward relations!

Commodities – More short covering in copper remains

When Western stock markets recently traded at new bear market lows most commodities didn’t follow! Is this by coincidence or do we have a “pattern” when combining it with the global stock sector rotation suggesting that the financial business cycle slowdown is very close to its bottom? We are undecided but the observations definitely continue to put pressure on those investors holding speculative short futures positions! And this is still evident in copper where a very large short position remains apparent; hence a further recovery in copper prices is very likely.

Currencies – The post summer 2008 USD recovery is faltering

Aside from ECB no other reasonable central banker wants a strong currency when caught in a deflationary environment, and when looking at futures traders’ positions the latest Fed initiatives (QE) came to some surprise as most traders were caught stereotype long USD and short almost all other currencies. Still, the big question may be who wants a strong currency the least? Fed, BoE, SNB, BoJ or even the Riksbank? We believe that USD could be in a prolonged price range dominated by two themes 1)“old US dollar collapse theorists” and 2)“US business cycle well ahead of Europe’s first recession with a euro currency” (1.23 – 1. 47 to EUR)!

Consider as a probability!

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