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 – Fortunately, downside fear feeds the upside

In the real world – away from the classroom – few things are as they were supposed to be, and often perspective and philosophy are more important than micro insights. Now, reading and talking to many types of market operators we continue to be met the attitude that “this recovery just cannot be true” and clearly people continue to search for evidence why valuations, EPS, net income, sales or the likes eventually will cause markets to turn down again. Obviously, they may be right but we also should remind ourselves that all experience informs us that when people fear the downside then the upside potential hasn’t been exhausted! Further, investors are still met by an encouraging impression as bond yields are low and ranging, a weak US dollar providing global liquidity, commodity prices only edging higher, leading stock indices trending higher and central banks holding back their exit strategies. Consequently, 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 – In the absence of central bank action

As markets moved away from “systemic breakdown” in March/May and major central banks during the summer ensured us that interest rates would stay low for an extended period then little has actually occurred in both money and bonds markets; interest rates and yields have traded within well-known levels. Now, in the absence of major central bank action then statements, research reports and news paper articles have caused four yield “waves” without really commencing a new overall directional trend… in spite of investors perceiving that the risk/reward ratio obviously favours yields breaking higher eventually. Stereotype perceptions are a dangerous thing, 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 – Buying pressure intensifies

Global commodities have been stable from June until early October benefitting a continued global economic recovery. However, measured in various currencies commodity indices have broken upwards or are pressuring to break higher! Speculative buying (and rising Open Interest in futures) also appears to be intensifying and with no extreme positioning evident (gold aside) then additional buying potential remains from this source too.

Currencies – Carry & momentum… not valuation

The global recovery in asset prices and economic activity is showing no real evidence of faltering – not least nourish by the anecdotal evidence that people remain occupied with why the recovery will falter ultimately. Therefore, the post March global recovery continues to support cyclical currencies as opposed to non-cyclical currencies, and to this script we can add global central bank divergences. This environment and the investment theme of “global central bank divergences” still support the carry and currency momentum in LatAm, Asia, commodity and cyclical sensitive currencies (SEK and NOK included) – not least with no market action suggesting that a short squeeze having commenced in USD. Clearly, any valuation concerns/considerations have little success. Finally, 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.

Below is the Dow Jones-UBS Commodity Index Total Return in USD, EUR, JPY, click on chart to enlarge, courtesy of Nordea Markets.