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 – Earnings season and year-end buying

The US earnings season continues to surprise on per share basis, net income and sales. Clearly, this is motivating all those disbelievers of the global recovery, but it also appears reasonable to ask whether the ongoing year-end buying is occurring based on an improved macro background or not. As economic surprises apparently peaked this Autumn (see page 2) current stock buying appears more related to year-end buying due to Western equity allocations having been way too defensive and that investors embrace a sense of Goldilocks from low bond yields, a weak US dollar providing global liquidity, relative stable commodity prices, leading stock indices edging higher and central banks holding back their exit strategies. With the “surprise effect” probably peaking a 2010 extension appears related to support from absolute macro levels, but the ongoing 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 – Euribor futures faltering

New yield lows in bonds and new interest rate lows in money market futures contracts are difficult to maintain. This not least illustrated by 3M money market futures in EUR and CHF breaking down from recent weeks’ trading ranges. Clearly, this suggests that traders sense that the odds for both ECB and SNB hiking in 2010 are rising – no matter that Australia is the only major central bank having hiked. With Fed, ECB, SNB and BOE still talking rather than walking the recent rise in yields and interest rates appears more related to perceptions and risk allocation towards cyclical assets rather than intensifying evidence that central bankers are providing tougher rhetoric for removing monetary accommodation! Overall, Bunds are edging higher and 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 political discipline” and 2) “hesitating central bankers”.

Commodities – New highs… measured in USD and GBP

Industrial metals are underperforming precious metal, and new recovery highs are only observable when global commodity indices are calculated in the most disliked currencies of USD and GBP. Therefore, the absence of commonality still advocates that global commodity prices remain relative stable. Stability should support a continued global economic recovery!

Currencies – Valuations versus central bank divergences

The performance by world currencies in combination with currency style (i.e. carry, momentum and valuation) continue to support our perception that the price discovery is ruled by the never ending US dollar collapse theory and the central bank divergences of the world. Few challenge the idea that emerging markets are leading us out of recession indicating that ordinary people in emerging countries are puling out USD from their mattresses and exchange these savings into local currencies. Currencies that are characterized by momentum (LatAm & Asia) and economic prospects advocating continued carry (i.e. central bank divergence) as these countries hold the best odds for future interest rate hikes. With investors sensing a Goldilocks scenario any valuation consideration is neglected – not least exposed by the already extreme large speculative short USD positions. We 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.