Monday, August 31, 2009

Bylov: Weekly Global Intermarket Perspectives

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 – Europe outperforming China!

It is clear to everyone that investors enthusiastically embrace the continuous positive economic statistics published during August while ignoring Chinese events (e.g. yet another stock market sell-off this morning). As mentioned before this recent divergence between China and Western bourses is a warning due to the fact that the lead global recovery story or theory is based on exactly China. Europe is now clearly outperforming China and this is most likely due to rebalancing among asset allocators (from China/Asia to previously very underweighted Europe) rather than a changed perception of the long term relative macro growth prospects! Consequently, we believe that our recent caution about the new stock market highs in the West remains prudent while recognising that real market action still doesn’t confirm our short-term fear. These considerations cause us to still advocate buying some protection while remaining structurally bullish.

Bonds – Holding up well in spite of strong Western bourses

The month of August has seen a clear overweight of surprisingly “strong” economic statistics, Western bourses making new high ground and a stable US dollar. In spite of this encouraging recovery development even long bonds have held up well, and not even last Friday’s bearish technical “Key Day Reversal” signals could encourage some follow-through selling in bonds. These observations are perceived to illustrate that investors are generally becoming somewhat concerned about the valuation of cyclical assets – perhaps even influenced by the China events, and that some of the recent reallocation evident between equities in China/Asia and Europe/West goes into bonds, and that long bonds are perceived as less overpriced with leading central bankers talking dovish about implementation of exit-plans. Overall, we continue to expect prolonged trading ranges in yields and that the short-term direction will be guided by the two transient investment themes: 1) “supply fear and economic recovery” and 2) “high real yields and central bank responses to protect a fragile global macro economy”.

Commodities – Industrial metals remain strong

With Chinese stocks in trouble, the speculative short squeeze in copper futures over and classic recovery potential in metals almost fulfilled then we maintain that risks are increasing to a commodity exposure. Still, our recent caution about commodities lack any clear downward price momentum to confirm that such fears are become reality.

Currencies – Global and local Japanese events suggest caution

A soft revolution is taking place in Japan with the political change of power at this weekend’s election raising prospects of a major structural change and the Japanese tax exemption to internationally held funds have helped JPY recovering this month. Or are there more to the gains in JPY? We still believe that the severe correction in Chinese stocks is a warning as China has been the lead story in the global recovery… and USD has been stable during August with CAD, AUD and GBP registering some depreciation in spite that CAD and AUD remain very popular among speculative futures traders. Other questions can be raised why CEE currencies haven’t outperformed with global macro statistics overwhelming on the good side during August and Western bourses at new highs. Adding it up, we remain structurally bullish but short-term risks appear to be building to cyclical bets. Accordingly we are recommending buying protection e.g. via a put option in AUD/USD. Be aware, our short-term risk scenario still lacks confirmation.

However, I do like this chart. Where are the bears? They are usually coming when nobody expects them ...

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