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 – LatAm and Asia lead the way forward

With the Short Interest in cash stocks little changed during the recovery it appears that market pundits remain divided into two groups of perception: 1) “this is just a suckers’ rally within a structural bear market” (the fear demagogues) or 2) “having faced unlimited downside risk in March the significant recovery illustrates that markets still respond to traditional economic stimulus”. Now, whatever one believes lots of indices have approached conventional “overbought” technical levels causing concern as risk/reward considerations are moving back towards balance. Still, we remain optimistic based on the concept that we already have faced “unlimited downside risk” (OECD in March) and that it consequently will take a new black swan accident to cause global equity markets to extend the bear market lows of 2009! Further, we find it extremely interestingly that emerging LatAm and Asia found the low already back in October/November 2008 and have led the way higher ever since. We are on the road back from hell!

Bonds – Environment deteriorating at the long end

Arguments against holding long government bonds appear to be building in the minds of global asset allocators whom are influenced by: 1) performance by global asset and debt markets providing evidence that the bottom of the financial business cycle has been passed, 2) the enormous bond issuance to finance the unprecedented rescue packages, 3) already historic low interest rates and 4) rating agencies in a process of lowering the outlook of sovereign debt. Definitely, we also subscribe to the evidence working against owing long government bonds, but any case has two sides to consider. Most importantly, central banks are unlikely to allow a crash in bonds with the global macro economy still fragile – not least to support the housing market. And we should neither forget that the Japanese bond market with negligible yields outperformed longer than any asset allocator had ever imagined. As a consequence, we maintain that long bonds hold unattractive risk/reward ratios, and that any buy strategy must be considered of short-term nature. Currently, market action in Bunds and Treasuries remain bearish!

Commodities – Precious metals still in favour

Agriculture and energy prices are edging higher while industrial metals continue to show evidence of losing buy momentum. Still, the overall recovery in commodities has importantly NOT been driven by speculative interest (re. CFTC report) which is considered an important and constructive piece of evidence as financial markets already have experienced “unlimited downside risk” advocating that the financial business cycle has passed its bottom. Future challenges still appear evident, however, with precious metals performing well (a battle with fiat currencies?).

Currencies – Hedging fiat currency risks

The general recovery in minor and emerging currencies are clearly losing momentum and judged by the positioning among futures traders currency bets are being concentrated against USD and GBP; meanwhile buying of precious metals (physical as well as stocks) continue unabated. Now, with ratings agencies in a process of lowering the outlook for sovereign debt this raises an important question whether market operators are hedging the inherent risks of fiat (paper) currencies currently centred on USD and GBP? Undoubtedly, “old USD collapse” theories are moving back into fashion, and with market action clearly against USD, and the financial business cycle having passed its bottom, a weaker USD holds the upper hand.

Consider as a probability!