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 – Weak statistics versus Goldilocks

Economic surprises (G10) appear to have peaked during September suggesting that the continued building of long positions among the speculative futures traders (re. CoT report) are due to underperformance (most investors haven’t believed in the recovery) rather than the emergence of a new bullish macro theme. Definitely, this is a deteriorating development suggesting that our perceived underlying market strength could be challenged further in the weeks ahead. Overall, we still believe that the environment remains attractive due to the low bond yields, a still weak US dollar providing global liquidity, stable commodity prices, leading stock indices dominated by a sequence of higher reaction lows and central banks still holding back their exit strategies. We are structurally bullish.

Bonds – Lowest yield levels since spring 2009

Last week German and US 10 year government yields broke down from recent months’ ranges and are now trading at the lowest yield levels since spring 2009! With the economic surprises within G10 peaking during September the bond buying could originate from two beliefs: 1)the economic recovery is finally faltering again and 2) leading central banks will postpone their exit strategies for longer than expected. Now, with most asset classes having recouped a significant part of the 2008 indiscriminate panic selling a new hostile bond theme has to surface to cancel out the otherwise constructive bond environment originating from peaking economic surprises and the fact that leading central bankers continue to assure that they will provide amble liquidity and low interest rates for an extended period and that the immediate threat of inflation should be considered a very low probability. This development is perceived to support our overall expectation of prolonged trading ranges in yields, and that the yield direction will oscillate between the popularity of two transient investment themes: 1) “supply fear and exit strategies” and 2) “high real yields and hesitating central bankers”.

Commodities – Underperformance

It remains our opinion that it is important to track the global commodity price performance in all major currencies to get a better grasp of the underlying forces. This shows that global commodities haven’t been able to produce and maintain new recovery highs since June, and consequently, global commodities continue to provide signs of stabilising. This should remove a concern to a continued global economic recovery!

Currencies – The risk of short USD squeeze is real

There need not be an attractive connection between an investment story and an investment case as the story can already be well reflected in current market prices! Therefore, we now believe that the risk of a short USD squeeze has become real as 1) recently, prominent forecasters have overwhelmingly been downgrading their USD forecasts, 2) speculative short USD positions are almost 2 standard deviations from the historic mean and 3) the options market is not paying up USD put options. As always, market action is needed to confirm and fortunately for the USD collapse theorists such market action has not yet presented itself. Clearly, historic valuation considerations are currently being overwhelmed by the desire for carry and the feel-good factor of momentum! Similarly, we continue to favour our May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD but tightening one’s protective measures are now advisable.

Think of the depth of thought - "an attractive connection between an investment story and an investment case as the story can already be well reflected in current market prices"? Below you find the historic performance of four main asset classes, courtesy of Nordea Markets, click to enlarge!