In general global macro trends are taking it nice slow and easy! The trends that started late last year/early this year remain firmly in place. However, given how extended the rallies in some of the asset classes have become, we would not be surprised to see some counter trend behaviour over the coming days. We think the trigger for a counter trend rally will be bought on by a short term rally in the USD Index. However, any rally in the USD Index is likely to be short lived, perhaps 2% from current levels. We say this because we have not seen any meaningful bearish behaviour in emerging market currencies, stocks or bonds. If history is anything to go by any material (tradable) strength in the USD Index is preceded by weakness in relatively illiquid emerging market assets. For the time being at least, anything emerging market remains decisively strong. For how long will this condition last? We don’t know, we are mere mortals and do not profess to be above the market! All we know is that once a macro trend becomes entrenched it tends to last for months rather than weeks.
The broad Value Line could be classified as overbought but we have a feeling that it is going to stay overbought for some time to come.
Investment grades bonds are also following on the heels of equity markets. It is encouraging to see risky high yield corporate bonds continue to outperform investment grade corporate bonds.
Commodity markets continue to be a source of frustration for directional players. They have gone nowhere since the start of June. We think that the next big break will be to the upside.
The chart pattern of the big USD Index is convincingly bearish. However, a few too many punters are now leaning on the bearish side so we expect some sort of counter rally to shake the weak hands out of the market.
The recovery in the real estate market has taken many by surprise. It is important to note that anything to do with real estate or construction is doing well which suggests that the behaviour of IYR is not another false move.
So whilst we will not be surprised by some retracement over the coming week, we will be very surprised if it is material. Accordingly we see any reversal of the long term bull trends in equities, commodities, real estate, and corporate bonds as a buying opportunity and a selling opportunity for the USD.
