Bylov: Global Intermaket 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 – The recovery remains on track

Market sentiment surveys are biased on the bear side (e.g. AAII and Bullish Sentiment) and futures traders (primarily hedge funds) concentrate on relative bets rather than a directional bet on the whole market. These observations suggest that investors are concerned about current valuations and neglect the continuous flow of constructive macro statistics everywhere. Climbing the wall of worry has been a general characteristic of the 2009 global recovery! Recently, we have feared a wider effect from the 26% correction in Chinese mainland stocks, but this appears just to have ignited some reallocation between EM towards Europe, and with the Chinese stock market having stabilised last week the potential negative effect is fast fading. Further, we continue to observe no real deterioration in the market action within leading Western stock markets, and we consequently conclude that a new hostile market theme has to surface to produce a real threat to a continuation of the 2009 global stock market recovery. We remain structurally bullish.

Bonds – More trust in central banks’ exit strategies

German 2-year yields are trading at new record lows as are UK equivalents and Swedish yields following fast… and US 2-year yields are trading at levels seen in early 2009 when fear of “systemic breakdown” ran high. Now, with cyclical assets showing little real evidence of peaking the continued downward pressure on short rates are perceived to illustrate that investors are gaining trust in the continuous stream of central bank statements of caution when to begin implementing the famous “exit strategies”. Consequently, recent months’ aggressive pricing of interest rate hikes are being cut back, but they are unlikely to disappear due to risk/reward considerations i.e. when it happens rewards will be high! 10-year German yields are trading at the centre of recent months’ range which can only suggest that odds for successful short-term trading are less than 50%. Overall, we continue to expect prolonged trading ranges in yields and that the yield direction will be guided by the two transient investment themes: 1) “supply fear and exit strategies” and 2) “high real yields and hesitating central bankers”.

Commodities – No major breakdown still

The Chinese stock market correction has stabilised and industrial metals like copper and silver continue outperforming while oil favourably has stabilised within recent months’ price range below $75. Consequently, whatever one perceives about a continued global economic recovery the commodity sector shows no sign of real price deterioration!

Currencies – Cyclical bets still hold the upper hand

Recently, we have feared a wider effect from the 26% setback in Chinese stocks, but last week local Chinese stocks stabilised and Western leading stock markets were never shaken for real. Combining this development with the continuous flow of constructive macro statistics and central bankers assuring us of their cautious implementation of exit strategies then cyclical bets should continue holding the upper hand. AUD, NZD and CAD remain the most favoured bets among traders, and the continued evidence of a global economic recovery also suggests that individual macro differences will gain importance – not least among emerging currencies benefiting e.g. PLN and CZK. As we remain structurally bullish we also still favour carry basket strategies e.g. our May -09 recommendation of long BRL, TRY, RUB funded by CHF and CAD. Generally, a new hostile market theme seems necessary to reverse risk taking, and neither USD shows signs of this!

Indeed, there is too little evidence of deterioration so far.

Below is the chart of "Historic performance of four main asset classes", courtesy of Jan Bylov, Nordea Markets, click to enlarge.

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