Volatility across asset markets continues to be the theme. The pull back in Europe has been deeper than most anticipated but the structure of the equity bull market remains unchanged, for now. Selectivity is the theme as the tired bull struggles on. The most dramatic change has been on the bond side with is certainly a very negative cloud now hanging over this market. Bond yields rising is ok but only so long as the data remains strong and the rise is moderate and not volatile. Europe’s over sold levels came into being from extreme volatility being seen in the euro fixed income markets. Its a tight rope this but it remains a bull market on an equity index basis.
In terms of sectors the commercial real estate sector needs to be watched carefully here for a top. Commercial real estate is particularly sensitive to rising yields but like the US residential mortgage market is rates at the longer end of the yield curve that matters more than the short end. For now the treasuries short end and longer end are rising but if the data disappoints in any way we may well see rates tumble again at the longer end that would be a positive signal for US mortgage rates as well as commercial real estate rates.
Currencies wise, the Conservative outright win in the UK was hugely significant. It was clear that the market had priced in a sterling valuation that was by as much as -5% vs the US$ due to a hung parliament etc. It was a high momentum value reset on the election news, perfect. Greece rumbles on and the Euro data continues to disappoint. The ECB’s balance sheet expansion is not what was hoped for. These are negative head winds to the Euro and I agree with the Swiss team here below that the likely US$ high for this year has not been set, yet. Macro wise the US economy continues to record the best data (UK aside), has the highest ten yr bond rates and is likely to be the first mover on higher over night rates.
Worth mentioning the sterling/US$ pair, the UK housing market runs on variable, short term interest rates. It is unique in this respect. It is inversely correlated therefore to over night interest rate movements. Amongst DM economies the UK is therefore usually the alpha inverse correlation to short term interest rates. Cable has an extremely high positive correlation to the UK housing market. Put it together with world wide short term over night rates likely to move higher this year there are clear implications for cable later into this year. Its one of the macro trades that is likely to run and provide a good tail wind to the bottom line.
Without more delay here the Swiss team’s latest. They remain, as do Goldman’s Bullish Euro Stoxx50. (Note below GS is now very low on conviction trades vs earlier in the year!) The euro equity indexes have been a volatile trade but i remain long namely on the ftse100, Dax, Ibex35 and stoxx50 (which i added to last week, in spite of the worrying level of choppy price action).
Here GS
I do like this next report. From UB again but taking a more pure chart tech perspective than the report above. We are very close to the turn but these bull markets do have a habit of running in a sort of vacuum of persistency for longer than logic (and earnings) would dictate. Getting ahead of price is a very dangerous thing to do.
And here an FX tech update from CS:
The full set of updates later today and tomorrow.
Here the updates:
Its a pretty bearish perspective this with a large forecast to the downside for the euro equities. I agree that the euro data is disappointing and Germany is even more disappointing. Given the combined affect of super low interest rates plus ever larger trade and current account surpluses the recent German weakness is disappointing indeed and hard to digest as more than a temporary blip in this environment of “growth” albeit low global growth. German consumer’s although spending more are saving even more. Reports on Germany below. Nonetheless i’m not bearish here. Stoxx50 and many euro indexes have sold off nearly 10% in 4 weeks. That’s official correction territory in spite of the euro losing -22% in the last 12 months. The Stoxx50 is +14% in the last 12 months. Euro indexes look cheap given the combination of quantitative easing and the fx move. Of course, in my view. Given the heavy weighting of the euro stoxx50 to exporters it shouldn’t score a -0.5 beta to the fx move over the period. So long as the global bull market for risk holds the longer term mean valuation should re-emerge. Having said the above for technical price reasons these are edgy times nonetheless for those long euro equities.
Here some db macro reports on Germany:
And here ML taking a more bullish tone.
And here RB with their usual weekly macro update.
Note the gold correlations. Zippo. Gold has completely diverged from all financial assets on medium term timescales. Bullion has become the defacto last asset standing. In a way this is a golden opportunity, excuse the pun. Manual asset allocators are ignoring the asset class for now and as the correlations have broken down so too are the algo robot allocators. Expect volatile moves in the bullion ahead as confusion reigns as to what role the asset has.
Here CS with their multi asset take on what to allocate to at this tricky time of potentially rising rates:
And here CS again bullish euro banks. Credit is starting to flow again, although from very low levels.
And here a great technical report from SG on rates.
If i can two things here:
1) Technical analysis’s accuracy is highly correlated to the number of participants and volume in the market. Although issuance has been strong in credit markets trade volumes have not. The FI markets are thin and this makes them susceptible to sharp moves in either direction.
2) We still have very active intervention from global central banks. They are manipulating FI rates. The BOJ is buying domestic equities, FI and also US Treasuries, as one example.
I don’t say don’t use technical analysis on FI markets but i do say use it on longer time frames and be careful to use its correlation indicators too sharply, if this makes sense.
Lastly lets look at these central banks balance sheets again, care of Yardeni.
ECB Disappointing. Do they need another crisis to pump more euros into their system? Very likely so by the look of things. They are meeting their 60bn a month target but its via the local central banks purchases not the private sector covered bond purchases, as expected. The Euro depreciation has been far more powerful than the ECB’s very limp “bazooka”.
Lets keep navigating through these choppy waters. So far so good but with some very large challenges ahead by the looks of things.
All the best guys
Rich