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 – Depression fear continues to be removed

One month ago investors were fearing unlimited downside risk, but the subsequent public initiatives (TALF, PPIP, softer mark-to-market rules & G20) have cancelled such “systemic risks” and ignited a very strong global recovery led by Asia, LatAm and e.g. with the S&P500 Banks Index gaining 113%! Further, this removal of economic depression risk remains supported by a stock sector rotation towards early cycle sectors signalling that the financial business cycle slowdown is at the bottom! Now, the macro economic situation remains dire which will keep “bears” alert to any fading buy momentum, but with the Nasdaq bourse in a bullish breakout from a five-month old trading range buy momentum remains intact. Finally, we perceive that odds continue to improve that we have witnessed important long-term lows, and looking beyond the short to medium term we expect that LatAm and Asia will fall less during setbacks and rally more subsequently and that the IT sector (with lots of intangible values) remains very attractive.

Bonds – Relief pressuring the long end

Market observers perceive that it is only a matter of time before ECB will join Fed, BoE, SNB and BoJ in exercising quantitative easing, and the Euribor/Eonia spread is responding by trading at pre-Lehman Bros. levels. With the macro situation very fragile central banks will continue “printing” new money and nursing the yield curve in support of the housing market and maintain high prices at which to sell the enormous amounts of government bonds. Now, this “manipulation” is currently counterbalanced by evidence that global investors are pricing in that we are at the bottom of the financial business cycle causing investors to remove their overexposure in bonds. Overall, two dominating investment themes continue to exist: 1) global recession and dovish central banks i.e. bullish bonds and 2) the fear of a major bond bubble i.e. bearish bonds. Combining these two investment themes with evidence that the financial business cycle is close to its bottom long bonds hold increasingly unattractive risk/reward relations!

Commodities – Industrial metals continue to outshine gold

We remain very influenced by recent weeks’ evidence that the global financial business cycle slowdown is close to its bottom – not least as this occurs in conjunction with industrial metals indices in their strongest recovery following the post 2008 crash and gold having settled down! With speculative futures traders still heavily short positioned in copper the recovery in industrial metals should continue… and gold to underperform.

Currencies – Will traders continue to dislike GBP?

Although GBP has recovery versus major currencies it still remains very disliked among investors and forecasters in general. To us it appears a surprise that GBP hasn’t benefitted more from recent weeks’ constructive turnaround in the market perception of global “visibility” ignited by the public initiatives (TALF, PPIP, softer mark-to-market rules & G20) which seam to have cancelled widespread fear of “systemic risks”. Now, with more global “visibility” and capital being allocated away from the most secure financial instruments we believe that speculative futures traders’ short GBP positions are at risk of a short GBP squeeze! Elsewhere, USD could be in a prolonged price range oscillating between current popularity of: 1)“old US dollar collapse theorists” and 2)“US business cycle well ahead of Europe’s first recession with a euro currency”.

Be careful!