Monetary backdrop favorable for risky assets
Updated: 2010-11-20 07:39
By Puru Saxena(HK Edition)
|
|||||||
Global stock markets are digesting their recent gains and the primary trend is still up. The ongoing choppy action is part of a consolidation phase and most stock markets are expected to be higher in six months. Despite concerns about Ireland's debts and China's inflation problem, stock markets are not falling apart. Instead, they are simply trending sideways and this suggests that most of the bad news is already priced in.
The monetary backdrop is favorable for "risky" assets, most nations face negative real interest-rates and the US yield-curve is steep. Furthermore, the three-month London Inter-bank Offered Rate (LIBOR) has not spiked and the Ted-spread (three-month LIBOR minus three-month Treasury Yield) has shrunk to 13 basis points. The fact that the credit markets are behaving themselves suggests that Ireland's problems will be pushed into the future by yet another bailout.
Although these bailouts will have disastrous long-term consequences; in the near-term, money printing is inflationary, thus supportive of asset prices.
Furthermore, when you take into account various technical indicators (market breadth, new highs/new lows, VIX etc), a major waterfall decline does not seem likely. Instead, all technical data supports the view that we are in a multi-year bull market which will only end after a period of significant monetary tightening.
The stock markets of fast growing developing nations will likely continue to lead the way. Both China and Vietnam are currently on the bargain table. Both economies are booming and their corporate earnings are growing rapidly. Over the long-term, corporate earnings and cash flows decide the fate of every stock market, thus, this period of weakness is a great time to accumulate stakes in good Chinese and Vietnamese businesses.
Over in the energy complex, the crude price has softened somewhat and it is trading above $80 per barrel. After a period of lethargy, energy stocks have sprung back to life and are now outperforming broad markets. Energy stocks are still undervalued and investors should pay attention to upstream energy firms, offshore drillers and renewable energy firms. Currently, the renewable energy sector is unloved and out of favor amongst investors, therefore, this is the time to buy into great companies in this industry.
The metals markets are in consolidation mode. The prices of base as well as precious metals surged in anticipation of QE2, but over the past few days, they have given back some of the gains. This consolidation may continue for a while longer and the direction of the US dollar will give some clues. As far as the prices of precious metals are concerned, after declining for almost a week, silver firmed considerably Thursday and it has now retraced 38 percent of its decline. Despite this sharp advance, we continue to feel that precious metals are in a choppy consolidation phase and this is not the time to establish new "long" positions in physical bullion. Silver is still extremely over-extended relative to its moving averages. Therefore, more time may be needed before silver commences its next major leg-up within the ongoing bull market.
In the world of currencies, the US dollar has been strengthening from an extremely oversold level. Interestingly, on Thursday, the US Dollar Index backed off from its trendline resistance level (79) and is currently trading in a tight range. It appears as though support for the US Dollar Index comes in at the 78 level and as long as it stays above that level, investors should not establish new "long" positions in precious metals. However, should the US Dollar Index break below the 78 level, a renewed decline will be underway and this will be good news for gold, silver and various other currencies. For now, the Australian, Canadian and Singaporean dollars are still favored.
The government bond markets seem to be falling apart. Over in Ireland, bond yields have gone to the moon and, recently, yields have surged in most nations. It is noteworthy that despite the US Federal Reserve's plan to buy Treasury securities, US bond yields have been rising. Since the last US Federal Open Market Committee meeting, US bond yields have appreciated sharply and it appears as though the bond vigilantes are finally waking up to the horrors of monetary inflation. The bull market in government bonds ended in December 2008 and this sector is now in the early stages of a secular bear-market. Over the following months and years, bond yields are expected to rise, therefore investors should avoid making long-term commitments in this overpriced sector.
(HK Edition 11/20/2010 page2)