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 – Swine flue and stress test

People believing in Armageddon will undoubtedly feel encouraged by the potentially pandemic swine flue, but as with SARS economic implications are pure guesswork as opposed to the US banking stress test and investors’ re-pricing to macro levels consistent with an expectation of “just” a global recession. Therefore, concentrating on our endogenous financial and economic crisis we too agree that investors last week appeared fragile. However, we still believe that we should focus on the facts that 1) a sector rotation continues towards early cycle sectors signals the bottom of the financial business cycle slowdown and 2) investors have reportedly been very underweight stocks, overweight bonds and loaded with cash and 3) that the recovery reflects a re-pricing from global depression to global recession. We also believe that a further reallocation could take stocks higher before investors reassess such valuations being consistent with “a global recession”. Consequently, too little bearish market action has occurred to conclude that the recovery has come to an important halt.

Bonds – Very cautious about the long end

In spite of major central banks like Fed and BoE buying long bonds as part of their quantitative easing programs such bond yields are either moving sideways or edging higher, and with US bond strategists collapsing their “buy recommendations” to a new low reading it is clear that investors are very cautious holding long maturity bonds. With Europe lagging the US slowdown German bonds are doing slightly better… awaiting a hesitant ECB joining in with QE. Now, with global stock investors continuing to pricing in the bottom of the financial business cycle investors will probably need more than a swine flue to rebuild an 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 from enormous bond issuances 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 – Traders rebuild shorts in oil

Traders appear to be returning to oil with a bearish attitude suggested by the largest short futures position evident in many months. Still, they haven’t any reel confirmation from market action. Copper recently recovered to the roundaphobia 5000 level and overhead trading (supply) now questions much additional recovery potential. Generally, with the global financial business cycle slowdown close to its bottom individual product supply and demand imbalances are much more likely to dominate!

Currencies – US dollar slowly faltering

The traded US dollar index continues to show evidence of faltering near recent months’ highs – this not least illustrated versus SEK and NOK while the battered GBP still hasn’t felt much relief, and GBP remains the most disliked currency together with JPY and CHF. While some caution was evident last week we remain encouraged by the continued signs of stock investors returning to early cyclical sectors… emphasising that recent months’ extreme currency pricing did mark important turning points! Overall, 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”.

Consider as a probability!