Bylov: Weekly 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 – Global “visibility” appears to be clearing up

It appears that recent changes to the US TALF, the PPIP and the further softening of US mark-to-market rules have given investors confidence that the global “visibility” is clearing up. By now, Latin America is up +41%, Asia 39%, World 24%, USA 24% and Europe 16% from their respective bear market lows. This constructive development is not least observable through the recent stock sector rotation towards early cycle sectors advocating that the financial business cycle slowdown is close to the bottom. Still, with a terrible macro situation “bears” will be looking to fight back from these better levels! We believe that we have enough evidence to hold an optimistic view of the financial markets, but due to the terrible macro situation we will probably witness much more ranging activity until the real economy will show evidence of a recovery. LatAm and Asia should fall less and rally more and the technology sector appears very attractive. Chances are fast improving that we have witnessed important long-term lows, but still not conclusive!

Bonds – Trapped by two major themes

While ECB so far has been able to resist commencing quantitative easing all other major central banks like Fed, BoE, SNB and BoJ are involved in buying government bonds etc. with the purpose of “printing” new money and nursing the yield curve to stay appropriate for the housing market and high prices at which to sell enormous amounts of government bonds. It seems questionable that ECB shouldn’t join QE as the state of the European economy and the banking sector aren’t outperforming other regions! Overall, we maintain that long government bond prices are likely to keep oscillating between the current fashion of the two dominating investment 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. Combining these two investment themes with evidence that the financial business cycle apparently is close to its bottom paying up for bonds holds increasingly unattractive risk/reward relations!

Commodities – Short covering in copper continues

We remain impressed by the fact that commodities didn’t follow Western stock markets to new lows during early March! This could be a coincidence but a “pattern” is evident when combining it with the recent global stock sector rotation suggesting that the financial business cycle slowdown is very close to its bottom! While oil is generally stable we continue to expect pressure on those investors holding speculative short futures positions – not least still evident in copper; hence a further recovery in copper prices is very likely.

Currencies – Prolonged range trading likely

A lot of the speculative flow has disappeared during the financial turmoil and with all major currencies in an extremely low interest rate policy mode the carry trade is of little interest. How about momentum trades then? With the macro situation extremely challenging everywhere – not least among the major countries/currencies - then huge macro related bets appear to be less likely too, and policy makers would undoubtedly appreciate to focus on all the many other problems at hand. Consequently, odds appear attractive that all major currencies (USD, GBP, JPY and CHF) will be trapped is big price ranges… until macro differences and monetary policy divergences become likely. This could hurt implied currency volatility a lot!

Watch the credit markets for the "visibility" of mark-to-bankers-dream (click through all links!) ...