Stocks – Financials cannot stop Goldilocks
The last three week’s worries have centred once again on the Financials sector (CIT, ING, RBS, Lloyds, Galleon, K1 etc.) with this sector leading the overall losses. It is most likely fortunate that the centre of trouble again is Financials as it is a well-known investor/human behavioural pattern that once we understand the root cause of a shock then any aftershock related to the root cause is generating a decreasing effect! Now, if we are right that Financials have been triggering the three weeks of profit-taking then we are probably right that the reaction won’t be able to stop the post March 2009 bull market and the encouraging evidence of “Goldilocks” from: bond yields staying low and ranging, the US dollar remains weak suggesting still amble global liquidity, commodity prices not soaring, leading stock indices confined within consistent post March uptrends and major central banks holding back their exit strategies. We remain structurally bullish, and an unusual large setback remains necessary to cause real worry.
Bonds – Japan in trouble and long bonds disliked
Prices for sovereign default protection in Japan continue soaring, and judged by the speculative futures positioning in US bonds and anecdotal evidence from market reports and opinion makers there is only one way to go for long duration government bond prices; down! Now, while the direction may be right as sensed by the crowd there is definitely an issue with timing, and judged by the overall ranging market action in US treasuries, UK Gilts and German Bunds we are not facing an imminent and widespread breakdown in Western government bond markets. Further, statements from Fed, Bank of England and ECB – the leading global central banks – appear biased on the cautious side about when to normalise the unprecedented cheap access to liquidity – not least emphasised by IMF stating that “The timing of exits… should err on the side of further supporting demand and financial repair”. Overall, 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 – Speculators increase commitment
Recent global worries (see Stocks) have not deterred the bullish conviction among Money Managers as they continue to increase their speculative commitment in oil and copper, and the gold interest remains enormous. Oil has now joined gold in extreme long positioning with oil traders now holding the largest long position since 2005! Traders appear to embrace “Goldilocks”, and market action continues to favour sideways to higher prices.
Currencies – USD bulls forgot the big picture
Once again, the importance of the big picture has proved itself! Lots of market pundits recently claimed the revival of the US dollar, while real evidence lacked all the time! Rather, investors were temporarily worried about the Financials sector (see Stocks) suggesting no major challenge to the otherwise encouraging evidence of a Goldilocks-like financial market environment. While we definitely believe that a USD reversal will have huge implications for the pricing of many assets/currencies the overall market action in USD pairs still argue for a weaker USD and interestingly, carry-style strategies have continued to perform all the time. We hold on to our very profitable May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD… we just raise our protection slowly.
True, these "Goldilocks" are designed to assure the survival of some Financials ... it would be a failure of...
Here we look at the performance of four major asset classes. Click on chart to enlarge, courtesy of Nordea Markets.
Where are those bears?
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