A rather dramatic “turnaround” over the last week has seen “risky” trades come roaring back to life. Many are surprised by this strength. We are not. Here is an excerpt from our report on the July 6th titled The Bull’s Line Still Holds
“Whilst equity and commodity markets maybe under some pressure, none of the significant support levels have been broken on the major market indices. The weakness in equities and commodities has not been supported by weakness in risky areas of other asset classes. High yield corporate bonds, emerging market debt and emerging market currencies remain only a few percent away from multi-week highs and well above support levels. Furthermore, the USD Index and US Treasuries hardly moved on Thursday. This behaviour is certainly not characteristic of the beginning of another tradable bearish phase in risky assets…….until there is confirmation across all asset classes of a move away from “risk taking” we see the current behaviour.”
We also commented on whether or not equities could lead emerging market debt, high yield debt, and emerging market currencies into a bearish phase of significance. From our observations at the time we thought that the smart money was in emerging market debt, high yield debt and emerging market currencies. Accordingly we concluded that equity and commodity markets would not fall materially and that we would soon see multi week highs in the S&P 500 and CRB Index. Well we are getting closer to a multi-week high in the S&P but still have a way to go before the CRB breaks higher. However, we continue to believe that markets will move materially higher over the coming weeks. We continue to look at the high yield and emerging debt markets for clues. These markets have made multi-week highs and show no sign of falling over.
Equities
Fixed Income
Commodities
Currencies
Why do we get the feeling that markets are poised to move significantly higher rather than significantly lower? I guess it is the behavior of the market that gives us this inclination.
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