Global Intermarket Perspectives And Questions About Value Of Implicit Policy Guarantees

Let's start with Jan Bylov, chief analyst at Nordea Markets, who 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 Dubai aftershock

Year-end is fast approaching and liquidity is drying out alongside; hence, intraday price moves can increase as we witnessed with the Dubai aftershock. And most likely, the Dubai incident is an aftershock tightly related to the well-known and well-analysed global credit and real-estate crisis, and we find that the market impact from an incident which finds its root in a now well-known problem keeps decelerating on every new aftershock! Further, in spite of the many prominent market pundits calling for a recovery peak global stock markets are holding up well, and just maybe people are underestimating that surviving companies have never been so lean and mean and capable of making profits as illustrated during the latest earnings season. Also, the shadow of the old “Goldilocks” remains evident as: bond yields are 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 erring on the side of dovishness. Consequently, we remain structurally bullish, and an unusual large setback remains necessary to cause a real worry.

Bonds – Fight between “inflation” and “deflation” believers

The wider consequences of the public intervention to halt the credit and real estate crisis are debated intensely, and judged by internet activity the fight between “inflation” and “deflation” believers is gathering momentum (see page 2). Now, when looking at US mutual funds flows hoarding of bonds are taking place at an unprecedented magnitude, while abandoning stocks! Is this disillusioned baby-boomers or true investor fear of deflation as so many people don’t believe in the global 2009 recovery? And are we witnessing the build-up to the mother-of-all and 1994-like long bond market squeeze? Clearly, “deflation” believers dominate with 2y yields trading at the lowest levels since January 2009 and 10y yields edging lower, and we continue to believe that this group of market participants are receiving a tailwind from the primarily dovish statements from Fed, Bank of England, ECB and the IMF… centred on the timing of “exits” should err on the side of further supporting demand and financial repair. Overall, we maintain 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”. Market action continues to back theme #2.

Commodities – Overall recovery remains on track

Intraday volatility aside, the overall commodity recovery remains on track and apparently also lifted by Money Managers (speculators) building long commodity exposure. This raises the risk of a long squeeze – not least in oil and gold – but with investors still embracing “Goldilocks” and the price uptrends intact then we continue to favour sideways to higher prices.

Currencies – US dollar downtrend intact

Characteristics of Peak Performers advise us to spend more time on market observation and less on prediction! Pursuing this doctrine we believe we can observe: 1) the post March 2009 consistent USD downtrend remains intact and 2) shorting of USD is a crowded trade and 3) global central bank divergence is against USD and 4) the “Goldilocks” theme works against USD. Therefore, we believe that it is premature to cancel the prospect for USD still heading for the 2008 lows! Consequently, we hold on to our May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD… with a protective stop (profit) now close to spot.

As usually, the look at four main asset classes provides an insight into longer term "performance pressure". Click on chart to enlarge, courtesy of Nordea Markets.

So far, so good! Now, close your eyes and read the comment by Lena Komileva, the Head of G7 Market Economics at Tullett Prebon, today:

The market is trying to draw the line between widespread risk-asset contagion and selective credit default. The difference between the present environment and 2008 is that there is a broad-based policy liquidity hedge in place and financial institutions are able to refinance risk even in shakier markets as central bank balance sheets have become the antifreeze for capital markets dysfunction. This leaves deteriorating institutional perceptions of credit risk to compete with favourable broad market liquidity conditions glued together by a global implicit policy guarantee. This has already prompted investors to look for value following last week’s risk shake-out even as they exit richer asset valuations. Yet, in the long run, the market's ability to withstand losses depends on the depth of the implicit government bailout for financial credit risk. The main lesson from Dubai and Greece is to question the value of the implicit public sector guarantee assumed across highly-leveraged assets, even if these are assets of systemic importance. Increased market risk sensitivity will remain a theme into 2010.

Isolated questions? Recovery in Spain, for example, for some time in the future ...