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 – Surprises remain generally on the upside

Humans fear pain more than we appreciate the same dose of gain, and this characteristic plays an important role in why investors “climb the wall of worry” during the most part of a bull market! Sentiment surveys, futures traders’ positioning and the usual gang of prominent names calling for Armageddon continue to provide evidence advocating that investors are concerned about the future and that “the recovery just cannot be true”. Such worries may or may not be right ultimately but with yields stable and low, a weak US dollar providing global liquidity, stable commodity prices and rising stock prices the current valuations don’t appear bubble-like! Further, 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 – Will central bankers risk a Japan scenario?

Undoubtedly, central bankers feel caught between the improving evidence of recovery and the risk of reversing the dovish monetary policies too early killing off the recovery before it ever became sustainable (and thereby committing the same mistake Japan did a decade ago). Now, aside from market rumours and blurred comments from central bankers we find it unwise to neglect the message from e.g. German 2-year yields trading at record lows. Such record lows appear to suggest two market 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. This warns against becoming aggressive in betting on the implementation of the famous exit-strategies! Bunds remain more ranging than trending which continues to caution being optimistic with momentum trading – and not least with central bankers talking so cautiously. 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 new recovery highs

The US dollar is under siege but interestingly, commodities are not producing new recovery highs measured in USD and certainly not when measured in EUR and JPY. Further, industrial metals have begun underperforming precious metals, and oil is remarkable stable below recent months’ high at $75. Consequently, global commodities continue to show signs of stabilising, and this should remove a concern to a continued global economic recovery.

Currencies – Public finances and exit-strategies

The full-blown US dollar attack continues and with Sterling under hefty pressure it appears that investors are abandoning currencies characterised by uproar on public finances and central banks whose statements regarding exit-strategies appear the most dovish. Further, investors seem to question that Fed wishes to cut back on the global USD liquidity with a still recovering economy. Additionally, rising stocks, stable commodities and ranging bond yields continue to resemble a shadow of the old Goldilocks scenario advocating that cyclical bets still hold the upper hand. As a consequence, we remain structurally optimistic/bullish on the global recovery and we still favour our May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD.

There are less bears remaining in the field. This should be the real new world where equities markets see the upside surprise, but bond market cannot get rid of "Japanese syndrome".