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 power of Goldilocks

Earnings season has begun well while macro economic surprises apparently peaked during September. Now, in absence of a new and stronger macro economic theme why are investors and speculative futures traders responding by buying so heavily? Well, we maintain that the dominating reasoning is found in that fact that most investors have been disbelievers of the recovery and hence underperforming severely! Consequently, with Goldilocks of low bond yields, a weak US dollar providing global liquidity, stable commodity prices, leading stock indices dominated by higher reaction lows and central banks holding back their exit strategies then underweight investors facing year-end are being pressured to allocate more capital towards global equities! The bull market will remain intact until the occurrence of a reaction which exceeds the June setback in both time and size. We are structurally bullish.

Bonds – Walking or talking!

Aside from Australia who recently hiked the official interest rate no leading central bank has yet walked the walk but rather talked the talk, and interestingly Fed’s liquidity operations are still causing investors to load up bills and short duration bonds… no matter the talk of governors! Volatility in treasuries is much bigger influenced by the anecdotal evidence from numerous research reports/opinion makers on an intensifying global debate about the timing and tools necessary to normalise the unusual historic monetary accommodation. A path which also includes a fight between central banks’ independence versus policy makers daring to reduce deficits. For now, leading central banks are talking the talk and postponing their exit strategies as they fear the Japan scenario and the public uproar about the government deficits. Just “talking the talk” should support bond prices and Friday’s selling was probably as much about asset allocation towards equities as it was about Fed talking! We continue expecting 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 – Precious metals the only real mover

Gold is breaking up from an 18-month range advocating a continuation of its long-term bull market! Now, aside from precious metals global commodity price remain quite stable in all major currencies, and they haven’t been able to produce and maintain new recovery highs since June. This stability should remove a concern to a continued global economic recovery!

Currencies – Central bank divergence

We have revised the overall dominating transient investment themes of the US dollar: 1)“the US dollar collapse theory” (unchanged) and 2) “central bank divergences of the world". Theme 2 has been altered as anecdotal evidence from numerous research reports/opinion makers suggest an intensifying global debate about the timing and tools to normalise the unusual historic monetary accommodation. A path which also includes a fight between central banks’ independence versus policy makers daring to reduce deficits. The global perception of central bank divergences continue to see an escalating and historic extreme short position in USD and GBP! Now, the current Goldilocks scenario continue to favour cyclical risk and rejection of historic valuation considerations as investors remain overwhelmed by the desire for carry and the feel-good factor of momentum! We too hold on to our May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD, and protective measures should slowly be tightened.

Historic performance of four main asset classes below, click on chart to enlarge, courtesy of Nordea Markets.