The Swiss are back from their holidays. They have released a very interesting new report which continues the theme we have seen for some extended time now of technical divergence between indicators and price across the major US indexes. They offer the possibility of a new Oct high in the SP500 of 2040 or so but strongly recommend not playing for this bounce. Never an easy call but mid to late October as the final high is now a possibility, which fits with my own thoughts btw.
The most interesting and new piece of work from the guys is the US$ bull wave which i have been playing for over the last few quarters. The team have always been expecting some renewed US$ weakness before a later cycle of strength. With the US$ bull emerging sooner than expected they have amended their models and now suggest selling any new gold and gold miner bounces. The break of $1240 a game changer. They are also now bearish inflation and bearish commodities therefore.
Putting it their model together and instrument projections with the macro back drop we can see that we appear to be entering another slow period of world growth and inflation. This will put pressure on bank balance sheets and consumer demand. Its always hard to predict which asset markets this will affect most but we can likely predict that currently high priced debt assets will likely be one of the worst performing asset classes if these low inflation or even deflationary predictions play out. Ie junk bond will not be the place to hide out during this wave as default rates increase. High quality reits however might be as higher rates look unlikely if low inflation beckons and tier1 corporate tenants are likely to be unaffected by any mild downturn. As they mention European assets, on more significant euro weakness are likely to offer a good value entry but only on sustained euro weakness. France and low inflation could make this occur sooner rather than later but we see on this. It will be very interesting what occurs on unemployment statistics and house prices as inflation drifts lower.
Here their latest report:
And here FX
And here the excellent cs chart pack
And here on the subject of what this new US$ bull wave means cross asset classes, CS:
And here MS continuing the theme..
Finally what is very clear is that policy makers are struggling to reflate their system. Given the endless liquidity dumped on this system over the last few years it has been a great surprise for gold bulls to see that inflation has not risen. Once again we appear to be cycling back into a deflationary scenario even as the ECB dumps another half a trillion into their system and the Japanese continue with their massive reflation attempts, China overnight dumped anther 80bn into their banking system. USD strength historically implies a tighter liquidity period. This would only be negated if the euro can become a true funding currency which it isn’t at present. The ABS and Covered bond ECB plan must be executed through OTC markets. The plan’s execution will be slow and arbitrary. The ECB has not, as yet, fired a sliver bullet into the heart of its deflation.
If you are sitting on massive asset price appreciation over the last years on property or stock its a real gain at present. Locking in some of that gain even to currency appears prudent to me here.
All the best
Rich