We have labor day holidays across US markets today which marks the official ending of the usual summer malaise in market volume. Sept is seasonally a volatile month and more often than not to the downside. Having said that August was a bad month for bond prices as rates marched higher across sovereign and consumer credit. This in turn lead to weakness in world equities and with key levels hit on Friday for US indexes inc S&P500, DOW30 and Russel2000 as well as DAX and many more European indexes. Some sort of bounce was likely across asset markets given the level we had reached and back in line with the 4.5yr cyclical trend higher.

US rates have re-compressed a little providing great relief to policy makers. US high yield has bounced off her Aug23rd low strongly and the spread to US 10yr rates has compressed which is positive for the cyclical stocks as its seen by participants of a continuation a normal recovery process. Whether it sustains is another matter but given no key levels have been broken the evidence remains with the bulls for now. 10yr rates continue to sustain at elevated levels which is bearish to the bears but bullish to the bulls as evidence of the recovery process. High yield bonds need to be watched as a key indicator of this cyclical recovery or not issue. Credit remains the lead on asset market direction given the amount of debt in our system. Corporate paper has a closer correlation to 10yr treasuries so rates are begging to rise at the non-junk end of corporate credit for any thing more than 5yr paper. (Which explains why the Verizon Vodafone deal has emerged now. The deal window was closing due to the corporate paper secular interest rate cycle starting to break. The parties knew it and pressed the button in the nick of time it seems. History will be the judge whether Verizon have timed this perfectly or at right at the top of a cyclical bull equity market with the resumption of the secular bear market about to reaffirm herself. Time will tell.

US consumer credit rates have come back a bit which was needed given the negative impact on mortgage refi and the amount of cash property transactions now in the US representing over half of all transactions. Auto loan rates continue to compress as at the shorter end of the yield curve. Rates remain near zero and the US auto industry is booming due to this as car sales have taken off with lenders more willing to provide finance at the shorter end and many with even cash back offers, at present.

Euro credit rate spreads to US rates have narrowed due to dovish comments from the ECB and not widened as you would normally expect. Euro HY has held up better than US HY as CS picked up last week. We should expect some sort of mean reversion here but this occur with a near term bounce in US credit rates rather than a significant rise in euro rates, for now. On the other hand EM spreads have widened as participants see risk in EM asset markets. Whether this spread mean reverts is more debatable and feeds into the world weakness which greatly explains the DOW30 weakness to russel2000 or equally ftse250 strength to ftse100 under performance. Unless the EM area’s use their reserves to stimulate local demand any mean reversion move may be very slow to emerge which will continue to feed into market weakness for the large caps. (Note Unilever was off nearly 25% from her recent high as a good proxy for the weak world demand picture).

Foreign exchange markets have been playing along to the taper or not tune we covered last week. The issue remains unresolved for now with key levels reached across dollar basket pairs as well as secondary FX pairs all have bounced off their levels and uniformly all have failed to break the prior cyclical trends. E.G. USDEUR, EURSGD, GBPEUR etc etc. For the moment the money trade has been to stick like glue to key levels and trade for a continuation of the cyclical trends in place.

As we picked up a few weeks ago the alpha trade in the market has been long GBP domestic focused assets fully funded GBP. Its a very rare event to find the UK as the world alpha trade and given the macro fundamentals of the UK economy in terms of productivity, relative labor costs, public and consumer deficits as well as trade deficits not to mention the structural long term fiscal issues with in the UK its very clear that is a cyclical alpha bounce rather than any secular revival in the UK’s fortunes. Once again monetary ‘juice’ can provide a substantial short term ‘kick’ to asset price volatility and GDP. The error for speculators is to confuse short term monetary and fiscally lead deficit enabled consumption for genuine investment and productivity lead economic growth. The two are quite different and as Scandia asset price history demonstrates, over the long term, such growth models only increases volatility of spikes in either direction. The mean will revert over the business cycle!

Back to the foreign exchange markets.

The technical levels are pretty clear. The moment issues on the recent euro strength are well covered. There is a divergence on USDJPY between the majors here. I’m currently short JPY vs the USD from the mid 97s. I note today’s reconfirmation of the prior breakout and believe we are likely to retest the may highs for the US$ vs the JPY. The secular JPY is dead and burried. The last 100 days have consolidated the prior breakout and now we should resume the giant new secular trend higher USD vs the JPY. I’m less convinced by the Nikkie 225 breakout of her secular bear market and for the moment am zero weighted towards Japanese equity issues.

Without more delay here a raft of the latest pre-eminent FX technical analysis reports from today’s leading investment houses.

First up SC from the end of last week:

SC-FX-26-08-13

Next up CS:

CS-FX2-28-08-13

Next up Citi here:

CitiFX-29-08-13

Next up Cmz team’s view here:

CMZ-FX-30-08-13

Macro wise the picture remains of very weak global growth. Global wealth is declining as picked up by CS last week. Global growth is slowing even as DM growth appears to be increasing slightly. Anything more than a very mild tapering is likely to badly impact western consumer consumption and asset prices given the evidence on demand already in the US from higher mortgage rates. Job growth remains super sluggish with euro joblessness remaining at prior levels on the latest print. The UK is leading the pack as mentioned earlier in terms of growth but its balance sheet lead via a highly accommodate BOE and government pouring fiscal incentives on to the UK property market. The US comes up as the second best performer but consumer durables were very weak as where the latest mortgage nos as were the latest jobs data. European issues remain although Germany remains strong and with her consumer’s picking up credit to sustain the falling world demand picture. Overall again, weak growth in DM markets, UK as the stand alone aside. EM’s facing severe headwinds for the moment with many asset prices deeply beaten up so a bounce likely in the near term. (Or else, they will collapse. A bounce the likely move).

here some reports from WF

WF-Wklymacro-08302013

And here

WF-GDPProfits_08292013

And here

WF-PersonalIncomeandSpending_08302013

All the best for now.. More to come on VIP area, the usual asset market technical briefings, as well as discussion in the forum area as usual. As said last week Sept/Oct will be key in defining many asset markets world wide.

All the best

Rich

 

 

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