Its that time of week again for a barrage of technical market reports and comments.
First up here the weekly market comments from SC:
SC-WklyMkt-View-16-August-2013
Over weight US equities and European equities and US$ high yield.They repeat their rational which is leaves the door open for a continuation of near term technical weakness.
“Recent earnings season supports our preference for US market. 72% of companies reported earnings above analyst expectations at the time of writing. We recognise short-term technicals appear a little stretched (see p6), suggesting the possibility of a temporary period of consolidation or a pullback, but this does not alter our positive fundamental view. We continue to believe investors who are not already Overweight DM equities should use any pullback to accelerate purchases”.
They stay under weight gold, ems. Note their comment on euro high yield credit which plays perfectly into comments and trade planning in the forum pages.
“Maintain preference for US HY over European HY. European high yield (HY) has historically offered a premium of approximately 1.5-2.0% over
US HY, but currently this premium is close to zero.”
They make this point but fail to mention what affect these higher rates may have on euro (& US) equities given the historic inverse correlation between equities (and all asset prices) and rising rates. A possible 3.2% rate on the 10 yr treasury by end Q4 2013 would mark rates at the level Goldman Sachs forecast, in their H2 report, for Q2 2015! That’s a meaningful (and bearish asset price) shift it occurs.
Next up the Swiss team’s award winning weekly comments.
They correctly recap that as soon as the S&P500 broke the 1685 level the 1652 level was quickly reached. Short term they sight the SP500 is oversold and due a bounce though as long as sentiment remains away from extremely negative readings any bounces now should be corrective only and therefore the guys recommend that participants :
“Remain short-biased into minimum later September/first half October. A break of 1654 would call for 1635 and a break of 1617 would imply that a re-test of the late June low is underway.”
The only proviso they make here is if the sp500 broke the 1709 level which they say would represent a new bullish wave into December 2013. Thought they give a low probability of occurring. Their momentum work indicates 1570 will be tested later in 2013.
Inter-market wise the semiconductor index trend break is meaningful and especially so for the cyclical implications. But so to they sight the continued weakness in Utilities and Consumer staples that is indicating more weakness to come in these sectors and so withdrawing their out performance call of the last few weeks on these two.
I want to interject here, on this inter market issue that i am witnessing this same phenomena that is very concerning for long asset market holders. Weakness is flowing from both cyclical as well as defensive sectors here. Diversification is no hiding place as it has been before on market weakness. Price is indicating, albeit an early indication, of a potentially perfect storm here driven by the secular ending of the bond bull market. In a world awash with debt and facing higher interest rates as well as a slowing economy a 1987 style panic is a possible, though currently ‘off field’ outcome.
European equities remain “toppish and vulnerable”.
Credit markets remain critically correlated to all markets and particularly so US$ markets. The secular top in bond markets was reached in May according to the guys which, if correct, has meaningful implications across all asset classes, as above.
“Sooner than anticipated, the T-Bond broke its July low last week, which is bearish bonds, and although we can see a bounce short-term this suggests higher yields into later this year. We continue to think that on the macro side we are trading in a very classic inter-market cycle, where rising interest rates are a threat for equities and in particularly interest rate sensitive sectors”!
And later this:
“We do not only see rising yields in government and EM bonds. With municipals and corporate bonds under pressure we currently see rising
interest rates across the board”.
I would add that rates cut the core of the entire market as debt levels are so high across the world. And be aware that US$ rates defines rates for the entire world.
On this basis, a tactical market opportunity currently shows on European high yield credit. Rates show a great divergence now to US$ high yield rates. European high yield’s rate spread to Bunds has also compressed. Unless the ECB is will to see the euro debase a long way the divergence to the $ high yield should narrow considerably in the coming weeks and the spread to bund rates should decompress again.
Bunds wise a break of 140 would be extremely meaningful, according to the team, and imply significantly high rates for Spain and Italy, especially given their current chart formations.
I include here the CS Fixed Income Team’s tech analysis, trades and comments. Note they have revised up their forecasts and provide a possible Q4 rate on the US 10yr up to 3.22%.
European market specifics inc levels I leave to the team to comment on and have little to add aside from the euro credit issues, as above.
Here the Swiss Team’s latest report:
I want to pick up the FX side of things here below.
As a new weekly regular i’ll be putting up CS’s FX weekly report. Ill do this as a part of issuing some macro reports, probably every Thursday or Friday, weekly.
And here SC on FX with their weekly tech report issued yesterday.
The FX markets have reached a very interesting point where secular trends are starting to intersect cyclical trends. The Eurusd is at a key resistance which is challenging a multi year cyclical bear market vs the USD. The GBP cyclical bear vs the USD is also on the verge of breaching a key level. The EURGBP also challenged the multi year cyclical bear last week and has key resistances close to the current price. The dollar basket is at a key support. What occurs here and now is likely to be meaningful for commodities, bullion as well as non US$ credit markets.
Here a couple of charts illustrating the EURGBP from a few days ago. None of the trend lines are new as they have been running for some time. The medium term chart to the left is an old chart with the trend line drawn several years ago. I don’t believe the cyclical downtrend vs the gbp is over for the euro in spite of the widely reported “return to growth” for the eurozone. For now this trend has another leg down. Whether we get a lower low i doubt but stick with medium term trend, for now. When the latest UK housing and debt ends then will be the time for the euro’s long secular bull trend to reassert and the pain will really start up in the UK as real incomes collapse and the nominal game is exposed but that’s later for now ride the bubble and lets enjoy.
As I’m running low on time here I’ll leave the detail to the two reports though i would add that i’m bullish US$ here today. We have the Fed minutes tomorrow and then the Jackson Hole meeting Thursday and Friday so volatility aside and some off field aside capital should flow back to the US$ especially as monetary policy looks to be relatively tighter than Europe and the UK and JPY.
As usual lets discuss the points on the forum pages.
All the best
Rich
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