Its been an interesting week which seemed to strengthen those forecasting a stronger US$, higher rates and lower bond prices.
This week the team have broadened their report to pick up on the very same issues I mentioned last week. They specifically highlight the very same USDSGD pair that i highlighted last week as in breakout and this being a good lead for em equity indexes. Also of course the JPY and NIk225 macro trade which is bouncing once again and offers much given for technical and macro well founded reasons.
US equities are toppy here on the near term at least and for the well discussed technical reasons given by the team according to sector rotation over bought issues as well as breadth issues which need to be resolved before the indexes can push on meaningfully. There are nonetheless very positive signals on the medium and longer term basis with good breadth and rotation signals as well as price momentum so the probability sits with longs, at least as soon as any near term weakness provides another entry. My own book remains long but without leverage now as i took profits on leveraged trades recently. I am still carrying jpy most recently again off the 100 area, long nik225 via Nomura etf (1321) long various locally Asian listed etf indexes and still gold (1540 in jpy) though i suspect equity will outpace gold in jpy until we see more meaningful inflation start to come through.
European equities remain cyclicals as minimum the beta play. The opportunity still exists for the euro carry (especially as the cftc its not a crowded trade any more at all). The potential for ECB action in Sept still presents as the data continues to be very weak, inc today’s macro data for the euro zone which was truly horrible. Bad news is still good news as far as the Euro zone is concerned at least. The Dax is now the euro beta cyclical play as Spain and Italy struggle due to their considerable domestic issues ie Italian fiance sector and Spain without a government. Dax is also better correlated with Asia and as above Asia appear to have turned. Team pick up again the 10400 level on Dax. Dax is usually volatile so if you are looking for entries on Dax i’d look for the level to break down as a false breakdown for entries long.
A final macro technical comment here. The fabled rise inflation and cyclical stocks has been forecast since the end of the credit crisis as a clear signal of the return of the normal growth of the economy. I suggest this time around it will occur also but not as a positive signal for growth but simply as a knee jerk response to inflation by the algo type allocations. We are all programmed, to some extent, to buy cyclicals on any hint of inflation as defensive type sectors are the last place you want to be during an inflationary phase. It follows tha tcentral bank action will eventually produce inflation but that inflation in itself is not a fundamentally positive signal of demand. It can simply be a staflationary signal of monetary expansion by central banks. In this scenario expect false stampeads to cyclical stocks and then sharp reversals as the inflation signal becomes stagflationary rather than inflationary. This is exactly what occurred in the 1970s. Please bring up a chart of the Dow through the 1970s and some cyclical stocks within it to see this phenomena. We have plenty of time to explore these issues at a later date.
Commodities wise – usd strength translating into some near term weakness. Still no bounce in copper.
Here the swiss team:
Apologies, Ill have to update this release later today, a Version 2 (V2) as I’m out of time for the moment.
Rich