Global Intermarket Perspectives Today: Wrath, Greed, Sloth, Pride, Lust, Envy, And Gluttony

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 – Wrath, greed, sloth, pride, lust, envy, and gluttony

Undoubtedly, many people feel that a certain group of capitalism’s entrepreneurs have committed the seven Cardinal Sins of man, and many believe that we will pay the price for years to come. Whatever one believes about mans’ sins we do appreciate that we know little about the future, but fortunately we do know the cardinal proponents of a healthy stock market: 1) valuations, 2) liquidity and 3) growth. Generally, valuations do not appear stretched, liquidity remains amble and growth moving in the right direction. 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. Therefore, the major risk parameters appear to centre on a general change of perceptions regarding the monetary policies of leading central banks and the direction of the US dollar. Consequently, we remain structurally bullish, and an unusual large setback remains necessary to signal a real worry.

Bonds – Dovish central bank talk under siege

The hoarding of US short duration bonds appears to have come to a halt during last week as suggested by the strong rise in 2-year yields commencing from the December -08 record low… coinciding with Friday’s strong US job report. Also, money market futures in US have taken a hit causing markets to again price in a 50% change of a hike in the Fed funds rate at the late April 2010 meeting. With “inflation” and “deflation” believers in an open fight of opinions the ongoing dovish central bank talk appears under sudden siege – not least due to the risk of squeeze among holders of the enormous amount of bonds (unprecedented size suggested by US mutual funds flow data). Now, we believe that bonds still receive 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. Consequently, we maintain that the yield direction will continue to oscillate/range between the popularity of two transient investment themes: 1) “supply fear and political discipline” and 2) “hesitating central bankers”. The overall market action still backs theme #2.

Commodities – Gold has stabilised

Last week’s $100 fall in the gold price – occurring on unusual large volume – suggests that the gold price will commence a ranging period above the psychological $1000 level. Profit-taking among speculative traders is also evident in oil. Elsewhere, industrial metals continue to show overall strength supported by investors embracing “Goldilocks”. With the traded $-index still not signalling a reversal (>77.74) underlying commodity strength is favoured.

Currencies – The crowded USD trade

Everyone knows that shorting USD is a crowded idea (positions > 2 stdv. from historic mean) and therefore they have been paying up for USD call options since late October. This risk awareness of a rising USD argues being cautious calling an imminent USD reversal – not least with little confirmation of a changed Fed policy and that the market action in EUR/USD and the traded USD index provides too little damage to the 2009 global USD downtrend (major stops <> 77.74). 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.

Below you can see "commodity reflation" via DJ UBS Commodity Index in USD, JPY, EUR. Click on chart to enlarge, courtesy of Nordea Markets.

Golden dead-lock?