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 – Many prominent bears are warning

As of May we entered the seasonal tough season for stocks and with the many prominent bears warning about what will come why are global stock markets still rallying towards pre Lehman levels? 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 and if that perception is correctly described then two important consequences are foreseen: 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 towards something like “below potential growth”. Finally, with emerging LatAm and Asia still outperforming and Western markets at new recovery highs we observe no real evidence that the re-pricing has hit an important halt… we remain on the road back from hell!

Bonds – Back towards pre Lehman levels

Numerous asset and debt markets continue re-pricing back toward pre Lehman levels creating a bond hostile environment in the minds of asset allocators influenced by: 1) the evidence that the bottom of the financial business cycle has passed, 2) the 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. Currently, market operators neglect the global output gap, central bank responses to protect a fragile global macro economy – not least to support the housing market. The road ahead is unlikely to be one-way traffic, but we maintain that long bonds hold unattractive risk/reward ratios, and that any buy strategy must be considered of short-term nature. Finally, the market action in Bunds and Treasuries remain bearish!

Commodities – The recovery surprises most pundits

Anecdotal evidence from various reports suggests that most market pundits are surprised by the continued recovery in all commodity sectors which are trading at new recovery highs. Further, the overall recovery in commodities has importantly NOT been driven by speculative interest (e.g. traders a 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 – Eastern Europe a question mark to allocators

Baltics remain in trouble and in general risk allocators will easily find other regions of much more long-term interest lead by LatAm and emerging Asia. This perception is probably behind recent weeks’ underperformance by Scandi and emerging European currencies versus EUR in spite of the still ongoing re-pricing of asset/debt markets towards something like “below potential growth”. Rather, it appears that risk is concentrated about developed currencies with short USD and long cyclical currencies the favoured strategy. Therefore, the “old USD collapse” theory remains in fashion, and with evidence in favour that the financial business cycle having passed its bottom, a weaker USD continues to hold the upper hand.

Consider as a probability!