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 – Profit taking mode spreading

Bellwether western stock markets have recovered to the January highs and thereby removing 1/3 of the overall bear market losses! Now, it appears that market pundits are split into two groups of perception: 1) “this is just a suckers’ rally within a structural bear market” or 2) “having faced unlimited downside risk in March the significant recovery illustrates that markets still respond to traditional economic stimulus”. Therefore, with indices having recovered to conventional “overbought” technical levels and consensus sentiment well into buy readings profit taking is spreading to most regions and sectors. Looking further ahead we remain optimistic based on the concept that as we already have faced “unlimited downside risk” it will take a new black swan accident to cause global equity markets to extend the bear market lows of 2009! Consequently, we are currently facing a congesting of the first move from “unlimited downside risk” towards below potential growth expectations… to be followed by higher stock market levels ultimately.

Bonds – Asset allocators gaining importance

With central banks already implementing unconventional market operations (quantitative easing) in a continued effort to improve credit access (also beyond the normal credit creation through the banking system) and interest rates flirting with “nothing” what shall it take to invigorate enough investor interest to force long government bond yields back to the historic low levels of recent months? More printing of new money? Statement of low interest rate policies for the next many quarters/years? Intensified central bank buying? Or will it increasingly be related to the oscillating decisions by global asset allocators whom primarily will decide based on their perceptions of either a global economic recovery or global economic recession. With evidence that the financial business cycle has bottomed we believe that decisions by asset allocators are becoming increasingly important, but also that long bonds hold unattractive risk/reward relations beyond trading opportunities. Whatever one may believe, 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.

Commodities – Recovery stabilising

In sympathy with other asset classes the recovery process which actually began back in February appears to be losing buy momentum – gold aside. Interestingly, the recovery has NOT been driven by speculative interest as data reveals that Large Traders in futures generally have stayed neutral or short – aside from a still hefty long position in gold. We find this evidence encouraging on a wider scale with financial markets already having looked into the abyss of “unlimited downside risk” in March and other evidence that the financial business cycle has seen its bottom.

Currencies – Is USD weakness a global signal of better times?

Futures traders are significantly concentrating their bets against USD and the recent change away from diversified reflation bets raises the question whether this move is a global constructive signal? Historically, a stable/weak USD works as a tailwind to the global financial and economic system and combining this experience with the fact that the we have already faced abyss of “unlimited downside risk” in early March we believe that the reported ongoing allocation away from USD is yet another piece of evidence of markets returning slowly towards better times. Further, this development increases the odds that the extreme currency valuations seen in Feb./March marks important reversal points!

Consider as a probability!