Bylov: 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 – The shadow of the old Goldilocks scenario

Encouragingly, market sentiment does not appear to becoming increasingly stereotype bullish with AAII and Bullish Sentiment surveys biased on the bearish side and Large futures Traders favouring relative bets and a small directional bear bet. Also, with prominent names (e.g. Stiglitz and SocGen etc.) very concerned about the future the overall situation appears to be that “the recovery just cannot be true” advising us that investors are still climbing the wall of worry. Further, the shadow of the old Goldilocks scenario appears currently evident with low yields, a weak US dollar providing global liquidity, stable commodity prices and rising stock prices. Consequently, with no real deterioration in the market action within leading Western stock markets we still believe 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 – No rush to implement exit strategies

It is probably unwise to neglect the market message from German 2-year yields trading at new record lows as is UK and Swedish yields following close after and US 2-year yields trading at levels last seen in early 2009 when the general perception was a “systemic breakdown”. To us this market message suggests two perceptions a) increasingly investors realise that leading central banks are in no rush to implement exit strategies and b) investors hold no strong belief in the post March 2009 global recovery in asset prices and macro statistics. Now, due to risk/reward considerations (i.e. when rate hikes eventually happen rewards will be high) investors will continue to price in rate hikes but the aggressiveness should continue to be cut back supported by continued cautious central bank statements and that investors generally continue climbing the wall of worry about the underlying state of the global economy and the financial institutions. Bunds still trade near the centre of recent months’ range arguing that odds for successful short-term trading is 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 – Stable in spite of weak USD

Interestingly, commodities remain stable in spite of the widespread bear attack at US dollar, and industrial metals have actually begun underperforming precious metals. Also, oil remains remarkable stable within recent months’ price range below $75. Consequently, global commodities continue to show signs of stabilising… and in all currencies; this should remove a concern to a continued global economic recovery.

Currencies – Full-blown USD bear attack

With the traded USD index at new post March -09 lows investors will ask two questions: 1) will a very dovish Fed and an economy under pressure bring USD towards record lows? and 2) does Fed want to see a weak USD to provide global liquidity to a recovering economy? Surely, the dovish Fed has reignited the old USD carry trade and the message from stocks, commodities and bond yields appears that of a shadow of the old Goldilocks scenario. Now, aside from temporary shakeouts (e.g. fear of a real US/China trade war) cyclical bets still hold the upper hand, and we remain structurally bullish favouring our May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD.

And the commentary on global asset class competition:

• commodity recovery stabilising
• US bonds continue stabilising above the substantial underlying trading (demand) following the late 2008 major upside breakout
• the US dollar at new lows
• stocks continue higher following the important bear market low in March 2009
• the shadow of the old Goldilocks scenario appears currently evident with low yields, a weak US dollar providing global liquidity, stable commodity prices and rising stock prices.

Click on chart to enlarge, courtesy of Nordea Markets.


Uffff! Is "the shadow of the old Goldilocks" a normal precursor to another Minsky moment? I still remember that kind of market propaganda...