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 – Worries dominate, not enthusiasm

CIT bankruptcy, ING breakup, lots of supply, hedge fund investigations and soaring prices for protection against a Japanese sovereign default – not to mention that prominent names like Bill Gross and Jeremy Grantham stating their bearish market views. Yes, it is understandable that investors are cashing in some profits and allocate towards more defensive sectors even as the reporting season continues to provide good surprises. Fortunately, there is also encouraging evidence from: bond yields staying low and ranging, the US dollar remains weak suggesting still amble global liquidity, commodity prices only edging higher, leading stock indices remaining confined within consistent post March uptrends and the major central banks holding back their exit strategies. Adding is all up, we find it too early to downgrade our post March bullish standing, and we would rather recommend checking whether planned exit/downgrade tactics (incl. exact levels) are fully updated, and remember to plan what you demand from markets before committing again if risk management stops should get hit.

Bonds – Big moves in sovereign protection

Portugal has been downgraded, Greece on watch and sovereign CDS prices are rising fast – not least for Japan. Now, in a week where leading central banks are setting rates accompanied by intensely followed statements will they be immune to last week’s returning investor worries (see also Stocks) and talk tough about the exit strategies? This appears unlikely and with little speculative interest in holding bonds (re. futures traders’ positioning) there appears little risk of an imminent major bond sell-off in Treasuries and Bunds… in spite of the widespread perception 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 continue to oscillate between the popularity of two transient investment themes: 1) “supply fear and political discipline” and 2) “hesitating central bankers”.

Commodities – Little affected by global investor worries

Global worries clearly intensified during last week and interestingly global commodities reacted quite calmly! Consequently, the post March demand for commodities and edging higher prices do not appear to have suffered any major deterioration – not least illustrated by the still speculative buying (and rising Open Interest in futures) with no extreme positioning evident… aside from gold.

Currencies – Still no shock USD buying

A lot of worries have been slowly developing during the last 10 days (see Stocks) and with investors having build an extreme large short USD position it can only be underestimated what the intermarket implications can be should a global short USD squeeze commence. This is our main focus now! In this regard we believe we can do some interesting observations: 1) with a shrinking US current account deficit and China still moving forward then the Chinese global re-investment of USD continues providing USD liquidity and 2) judged by the size of USD recovery – so far – no shock USD buying have occurred and 3) carry-style strategies continue to perform. Consequently, we find it too early to claim that all post March successful currency strategies have begun a reversal, and we hold on to our profitable May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD… while protective measures continue slowly being tightened.

Performance of four main asset classes below. Click on picture to enlarge, courtesy of Nordea Markets.
I cannot see a lot of bearish folks, as worries dominate, but nobody believes equities may melt down ... only up! US markets show "traditional reflation trade symptoms" (and short covering) early today.
I am still lazy sitting on my hands.

Japan still has some time to run, but has a huge potential to become the largest macro trade of decade.