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 – The clash of opinions

From a general fear of systemic failure, global depression and unlimited downside risk opinion has slowly transformed towards hope (and stock prices with it) that the worst has already been seen. Recently, however, it appears that opinions have begun clashing whether prices and valuations have run ahead of the macro reality as most data improvements are due to base effects. With market action revealing mostly range trading – as opposed to outright deterioration – the vote for the next big stock market move is probably still out there, and we should rather view markets in a position where odds have moved back into balance. Lets keep our eyes wide open and less biased about what surely must happen next from current price levels. Consequently, a summer chill and a recovery peak still lack real confirmation e.g. via major stock market indices clearly breaking below the May reaction lows (S&P 500 @ 878, MSCI World @ 910 & DAX @ 4653).

Bonds – Exit plans several chess moves too early

So when should the so called “exit plans” begin influencing the price discovery beyond the short-term? With the last twelve months’ experiences in mind - and the rollercoaster psychological swings in particular – market operators are likely to remain unusual sensitive to the ever oscillating moves in market opinions. In this respect, we find it interesting that the recent exit-plan-scare began fading right when yields were approaching historic important levels of overhead trading (bond demand) and that officials began voicing not repeating the Japanese monetary policy mistake of the ’90ies. Now, this latest apparent change of market focus supports our general belief that central banks won’t commence removing the accommodation before clear and real macro improvements are evident i.e. when the economic business cycle has joined the post March financial business cycle recovery; execution of exit plans are several chess moves too early! Consequently, our long held guesstimate of overall range trading in long bond yields is slowly improving its odds with the transient investment themes probably swinging between: 1) “supply fear and exit plans” and 2) “global output gap and central bank responses to protect a fragile global macro economy”. The latter appears to be gaining momentum!

Commodities – Metals hold up well

Although oil and industrial metals already have approached price levels questioning additional recovery potential there remains no real market action confirming important recovery peaks. Rather, odds just appear to be moving back into balance… and we still need oil and copper to experience falls exceeding previous post March setbacks (15%-16%) to confirm a recovery peak in the economic growth sensitive commodity sector.

Currencies – Eyes wide open

It is a challenge to be unbiased and an everlasting goal of keeping our eyes wide open. Currently, it appears that opinions are clashing whether or not the global recovery in asset & debt markets have run ahead of the macro reality. We would argue that odds are “just” moving back into balance rather than having provided real market action confirmation that a new and more hostile period is ahead of us. So far, there is no safe heaven USD buying and our carry basket (long RUB, BRL, TRY vs. short CHF, CAD) is performing. Currently, the worst which might be said is that currency bets appear very concentrated on cyclical sensitive currencies when judged by the CoT report of speculative currency traders (primarily hedge funds) – not least in AUD.

Consider as a probability!