Consider as a probability!Stocks – Climbing the wall of worry
With economic statistics indicating only a less bad situation most market reports remain doubtful of the sustainability of the widespread stock market gains. While such doubts might be true it definitely also suggests that investors are climbing the wall of worry… and hence not worryingly bullish. We maintain that market pundits are divided into two groups of perceptions: 1) “this is just a suckers’ rally within a structural bear market” or 2) “having faced unlimited downside risk in March the ongoing significant recovery illustrates that capital markets still respond to classic economic stimulus”. We subscribe to the latter perception which have two important consequences: a) having 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, and b) asset/debt markets are in a process of re-pricing toward something like “below potential growth”. Finally, with LatAm and Asia still leading the recovery and Western markets in consistent uptrends we observe no real evidence that the recovery phase has come to an important halt!
Bonds – Will Fed really hike?
US money market futures crashed Friday and are now pricing in a 27% chance of Fed hiking to 0.50% at the August FOMC meeting… in a stark contrast to the many market reports questioning the sustainability of e.g. the strong stock market gains. Undoubtedly, long bonds remain in a hostile environment as markets are pricing in: 1) that the bottom of the financial business cycle has passed, 2) enormous bond issuance to finance the unprecedented rescue packages, 3) already historic low interest rates and 4) fear that rating agencies ultimately will lower the ratings of sovereign debt. Clearly, market operators are currently neglecting the global output gap, central bank responses to protect a fragile global macro economy and the contrarian evidence that US bond sentiment is at extreme bearish readings. We maintain that long bonds overall hold unattractive risk/reward ratios, and consequently that any buy strategy must be considered of short-term nature. Finally, ongoing market action in Bunds and Treasuries remain bearish!
Commodities – The recovery remains on track
To the surprise of many investors’ allocations all commodity sectors continue recovering from the 2008 washout. Further, the overall recovery in commodities has importantly NOT been driven by speculative interest (e.g. traders are stubbornly short copper futures) which we considered an important and constructive piece of evidence… not least as financial markets already have felt “unlimited downside risk” advocating that the financial business cycle has passed its bottom.
Currencies – Europe not out of the woods
Profit taking from short USD positions it taking place probably also influenced by the evidence that Europe’s tensions definitely isn’t over. This not least illustrated by the troubled Baltic region and the continued underperformance by Scandi and CEE currencies versus EUR in spite of the still ongoing recovery in global asset/debt markets towards something like “below potential growth”. This underperformance should continue, and with little evidence of a major halt to the global recovery we have most likely only seen some temporary profit taking in short USD position as the “old USD collapse” theory remains in fashion supported by the evidence that the global financial business cycle has passed its bottom.
Well, for the balance of opinions, here I am listing also some bullish messages:
- Weekly update by ECRI on Weekly Leading Index and
- Global Scenarios by Danske Bank: A positive feedback loop
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