Stocks Slammed Lower For The Week (Or Why Can’t It Be Tuesday Every Day?)

After a few days of exuberant dead-cat-bounce, that credit and treasury markets largely chose to ignore, Russian headlines sent USDJPY (and therefore US equities) dumping hard into the red for the week (and the month). Tuesday was the week's big short-squeeze winning day (as one would expect) and then it was all downhill. Away from stocks, the USD ended the week modestly lower (-0.15%); treasury yields were mixed with some more notable flattening (5Y ~unch, 30Y -8bps); and commodities were very volatile. Copper had its 2nd best week in 7 months, oil its 2nd worst week of the year as gold and silver beat stocks and the latter remains the year's winner. A late-day buying panic (because why wouldn't you ahead of potential WWIII!) was led by a VIX ramming which managed to get the S&P briefly green for the week but it faded quickly into the close.


Year-to-date… the S&P dipped back under silver with gold the winner still…



Tuesday's ramplicious short-squeeze lived up to expectations but it was downhill from there…


USDJPY ran the show early until it hit its magical 102 level then weakness persisted in stocks and AUDJPY took over…


VIX was slammed to try and get the S&P back to green on the week and month…


Which managed to get the S&P briefly green for the week – but it tumbled into the last few monutes


But it left only the Trannies marginally higher for the month…


US equity markets have been very technical in the last 10 days or so…

  • The last week or so has seens the Nasdaq bounce perfectly off its 200DMA, rally to close just above its 100DMA, and then fade half way back today….
  • The Russell 2000 followed a similar path down to its 200DMA, up to its 100DMA, and now back almst back all the way to its 200DMA once again – down 3 days in a row.
  • The S&P broke its 100DMA, ripped higher through that and the 50DMA and came within a few points of record highs before fading today and testing back perfectly to its 50DMA
  • The Dow and Trannies remain well above the 50DMA but have dumped today to get back close

The S&P and Trannies remain green year-to-date but The Dow, Russell, and Nasdaq all notably red still…


Utilities just hit record highs and are by far the best performing sector


Treasuries saw notable curve flattening once again on the week – 5Y almost unch as 30Y yields tumbled 8bps…though note that bonds sold off after the European close


Credit markets rallied back modestly in the late day but notabnly diverged as Europe closed and equities bounced…


Copper had its 2nd biggest week in 7 months up over 2% as gold and silver outperformed stocks and bonds on the week… oddly, given all the tensions, oil prices slumped to the 2nd worst week of the year



Of course, don't be be too downbeat over the weekend – one more trading day and it's Tueasday again!!

Charts: Bloomberg

Bonus Chart: Bezos ain't laughing today…


via Zero Hedge Tyler Durden

Hillary Clinton Says Snowden “Helped Terrorists”

Defending the nation's mass surveillance programs because "people were desperate to avoid another [9/11] attack," Hillary Clinton, speaking at University of Connecticut on Wednesday night, noted that a balance must be found to "make sure that we're not infringing on Americans' privacy, which is a valued, cherished personal belief that we have." But her most controversial comments were swved for Edward Snowden, as she though it "odd that he would flee," since, she noted, "we have all these protections for whistle-blowers, " and concluded rather cryptically that, "turning over a lot of that material… gave all kinds of information, not only to big countries, but to networks and terrorist groups and the like."

As The National Journal reports,

"People were desperate to avoid another attack, and I saw enough intelligence as a senator from New York, and then certainly as secretary [of State], that this is a constant—there are people right this minute trying to figure out how to do harm to Americans and to other innocent people," Clinton said. "So it was a debate that needs to happen, so that we make sure that we're not infringing on Americans' privacy, which is a valued, cherished personal belief that we have. But we also had to figure out how to get the right amount of security."


As for Snowden's role in exposing the NSA programs, Clinton insinuated that she found his motives suspicious.


"When he emerged and when he absconded with all that material, I was puzzled because we have all these protections for whistle-blowers. If he were concerned and wanted to be part of the American debate, he could have been," she said. "But it struck me as—I just have to be honest with you—as sort of odd that he would flee to China, because Hong Kong is controlled by China, and that he would then go to Russia—two countries with which we have very difficult cyberrelationships, to put it mildly."



Clinton stressed the strangeness of Snowden's decision to flee to countries that have perpetrated cyberattacks against the U.S. She noted that when State Department officials would travel to Russia or China on diplomatic business, they would leave their cell phones aboard the plane with their batteries taken out. "It's not like the only government in the world doing anything is the United States," she said.


"I think turning over a lot of that material—intentionally or unintentionally—drained, gave all kinds of information, not only to big countries, but to networks and terrorist groups and the like. So I have a hard time thinking that somebody who is a champion of privacy and liberty has taken refuge in Russia, under Putin's authority."


With sarcasm creeping into her voice, Clinton implied that Snowden acted all too friendly toward Vladimir Putin, whose country has been harboring Snowden since last August

via Zero Hedge Tyler Durden

Russian Warplanes Repeatedly Enter Ukraine Airspace; Helicopter Buildup By Latvia Surges

If the following news had been “sourced” by Ukraine news agencies, we would caveat it by saying it is almost certainly propaganda. However, since the source for this AP story appears to be “US officials”, we will only assign a 98% probability to it being propaganda. Hot on the heels of our report that the Russian “Doomsday Plane” had been seen in the vicinity of the Baltic states, we learn of more Russian airborne acrobatics, this time involving Russian fighter jets which flew into Ukrainian airspace a “handful of times over the last 24 hours, in what one called a continued provocation of the heightened tensions in the region.” One, of course, being a “US source” – the kind that was behind the original armed coup in the first place, so one should take this “news” on a somewhat salty basis too.


The officials say it’s not clear what the intent was, but the aircraft could have been testing Ukrainian radar or making a show of force. The officials spoke on condition of anonymity because they were not authorized to talk publicly about the issue.


The flights come as Russia increases military exercises along the Ukraine border, including moving a broad array of fixed wing and rotary aircraft, infantry and armor troops.

But that’s not all: Bloomberg also reports that Russia has increased the number of helicopters at a military base close to the Latvian border from 30 to about 100 during the Ukrainian crisis, according to the Latvian Foreign Minister Edgars Rinkevics at news conference in Riga. In response, NATO has provided reassurance package for region, signaling that Baltic states are part of military alliance.

Well, yes: Russia did warn repeatedly that any escalations against east Ukraine citizens will provoke a retaliation, and when the Ukraine army launched its latest (however brief) anti-terrorist campaign, which lasted for about 12 hours before Kiev pulled it back after seeing a massive Russian army surge on its border it made sure of just that. Russia also warned NATO that any buildup in its forces would be met in kind. And since NATO did build up forces in East and Central Europe, why should one be surprised by Russia’s response.

It is a very simple game theory strategy: tit for tat. And now we have finally entered the constant mutual defection phase. This will continue until at one point the cost to a player to continue defecting will be great enough that a military “release” will be the only option.

via Zero Hedge Tyler Durden

PBOC Pressures USD Hegemony; Starts Yuan-Denominated Gold & Oil Trading

With 23 foreign central banks diversifying from US Dollars to Renminbi and the PBOC actively aiding numerous major financial hubs around the world with bilateral currency swap agreements, it seems yet another nail in the coffin of US dollar hegemony just got hit…


Nothing lasts forever, no matter how much you believe…

PBOC plans to start yuan-denominated gold and oil futures to help establish a global payment system for the Chinese currency, Guo Jianwei, deputy director of the second monetary policy department of the People’s Bank of China, is cited by Shanghai Securities News as saying.

PBOC will continue to push reform of interest rates, exchange rates and the capital account

The pace of Renminbi use is accelerating…

“In the first quarter, the RMB settlement of trade in goods amounted to 1.0871 trillion, accounting for the proportion of total import and export customs of 18.4% over the same period,” said Guo Jianwei, 18.4% and 11.7%, two figures, hidden vitality, accounting for just three months time improved 6 percentage points, indicating that the use of the renminbi is growing internal demand.

It seems the level of interest in diversifying away from the US Dollar is growing…

At the end of last year, China’s total with 23 foreign central banks or monetary authorities signed bilateral currency swap agreements, the total size of more than 2.5 trillion yuan.


Recently, the central bank after another with Britain and Germany signed a memorandum of agreement RMB clearing and settlement central bank, the European offshore RMB business to accelerate.


It is noteworthy that, in addition to London, Paris, Frankfurt, Luxembourg, Singapore, striving for offshore yuan trading center with only the United States “sitting on the sidelines.”

The goal seems clear…

Renminbi is a new bright spot in the next cross-border RMB business development.” Guo Jianwei, said the central bank will continue to advance the future of interest rates, exchange rate reform, capital projects, and expand the range of RMB payment using to promote the yuan-denominated policies, thereby establishing renminbi The global payment system and so on.

via Zero Hedge Tyler Durden

Stocks Slammed Lower As Ukraine Claims “Invasion Possible At Any Moment”

While stocks have been fading every bounce so far – and credit markets are particularly weak – it seems the following headline sparked the most recent wave of selling:


The Russell is the worst on the day but the Nasdaq is now at the day’s lows, and all are negative for the week and April.


Credit leading the way…


as all the indices are sliding hard

via Zero Hedge Tyler Durden

Measured By Gold And The Dow, Wheat Is Cheap (But Maybe Not For Long)

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Priced in gold and stocks, wheat is near multi-decade lows. That may not last.

Measuring the cost of anything in currency can be misleading. As we know, inflation can be gamed by authorities to appear low, and supposedly low inflation is actually high inflation if wages are declining while prices rise.

Longtime correspondent Harun I. has often recommended in these pages that we look to other yardsticks to get a more realistic assessment of price and value.

For example, what is the cost of wheat when priced in gold rather than dollars? Harun has graciously provided a chart of the wheat/gold ratio, which I marked up to identify when gold was expensive and wheat was cheap, and vice versa.

Priced in gold, wheat is at multi-decade lows; technically, this long downtrend appears to have reversed into an uptrend. If this is so, the only direction in the price of wheat (priced in gold) is up.

Here is wheat priced in the Dow Jones Industrial Average (DJIA). In essence, how many bushels of wheat can be purchased with one share of the Dow index?

In 1975, at the nadir of the stagflation-ridden stock market, wheat was expensive and the Dow cheap–once again, this is pricing wheat in the Dow, not the dollar.

At the top of the stock market bubble in 2000, the Dow was expensive and wheat was cheap.

When the Dow hit bottom in March 2009, wheat went up when priced in stock market shares.

Despite some impressive volatility since 2000, the trend in the price of wheat (when priced in stocks) is clearly up. Once again, it seems a long-term downtrend in the price of wheat has reversed and is now an uptrend.

The only way for wheat to regain its previous trading range is for gold and the Dow to both plummet or for wheat to rise in cost, i.e. it takes more gold or shares of the Dow to buy a bushel of wheat.

Priced in gold and stocks, wheat is near multi-decade lows. That may not last.Technically the trend has reversed, suggesting much higher prices–in dollars, gold or stocks–for wheat and indeed, by extension, for all food.

We may be tasting the first minimal increases in food prices that could soar to unimagined heights in the years ahead.

via Zero Hedge Tyler Durden

Sign Of The Times: 900 “Rich” Greeks Try To Steal EUR500 “Social Dividend” From The Poor

Thanks to the ‘generosity’ of their European overlords, the Greek government has been allowed to offer its long-suffering people a so-called “social dividend”. As KeepTalkingGreece explains, the one time paid allowance between €500 and €1,000 funded with money from the primary surplus of 2013, is designed to be for the poor; but over 900 applicants with assets over €500,000 applied for the handout and several dozen with assets over €2,500,000 had the balls to apply. As he concludes, “can’t help but wonder whether we are indeed a society in such a moral decline.”

Via Keep Talking Greece,

More than 450,000 people have submitted requests to receive the so-called “social dividend” a one time paid allowance between €500 and €1,000 for the poor, funded with money from the primary surplus of 2013. However, among the really needy, were also several dozens of Greeks with assets and properties worth even  €2,500,000.

“900 applicants had assets of more than €500,000 and yet they applied for the social dividend,” Greek media reported on Thursday.

In the exclusive story of daily TA NEA, several examples of the bold Greeks who applied for the allowance were:

  • A couple from Evia with real estate worth €2.3 million, family annual €102,000 euros and residence of 230 sq.m.
  • A five-member family from Kalithea in Athens, with annual income €110,000,  real estate worth €540,000,  a car of 3500 cc and €50,000 from deposits interest.
  • A family of four from Paleo Faliro in Athens with real estate worth €2.7 million and annual income €90,000.
  • Among the other exemplary applicants is a family with a swimming pool, a family with a 10-meter-long boat.

Applications for the social dividend are done electronically, the strict criteria refer to annual income up to 9,000 euro.

According to unverified information, the application is approved or rejected within minutes as the electronic system has immediate access to the taxation date of the applicant.

I could hardly believe my eyes this morning when I read the story. I thought of cases of families with a home of their own and no other income but one salary that can hardly covers the monthly expenses. I thought of families with less than 12,000 euro income and two properties who are unable to sell one of them because nobody buys it. I thought of this elderly woman with land properties in God-knows-where-land  and a home of her won who can hardly pay her electricity bill. And yet, according to the deemed income taxation system they are not eligible to apply for the social dividend.

And here come some people with nerve and try to grab a 500-euro allowance from the really poor.

?  can’t help but wonder whether we are indeed  a society in such a moral decline.

via Zero Hedge Tyler Durden

Russian “Doomsday Plane” Spotted Flying By Finland Border

The last time the Russian “Doomsday Plane” was seen in the air doing its trademark loops at 27,000 feet telegraphing Vladimir Putin was somewhere nearby, was on March 31, just days after the formerly Ukrainian region was annexed by the Kremlin. Until today, when over the past 4 hours, the Tu-214 has been quietly circling in position just shy of Finland and the Baltics, where as it is known, NATO has been depositing hundreds of western soldiers in a “defensive” build up.

What is the “Doomsday Plane”? Here is a reminder:

The Tupolev Tu-214SR is a Russian Special Mission Aircraft believed to act as a communication relay aircraft. This kind of aircraft is often dispatched by the Russian Air Force to accompany Putin’s presidential aircraft on its travels and for this reason it is considered the Russian version of the U.S. E-4B, a so-called “doomsday” plane, with an airborne command and control role.


* * *


America isn’t the only superpower with a “Doomsday Plane” for its head of state. When Russian President Vladimir Putin needs to escape danger, he hops aboard this top-secret flying communications center.


A special missions variant of the Tupolev Tu-214 commercial transport aircraft, the Tu-214SR is Russia’s answer to the US E-4B, an airborne command and control plane built specifically for the Russian president’s use and considered successor to the Ilyushin Il-20 Coot, which has been in service for the better part of four decades. Produced by Aviastar SP and Kazan Aircraft Production Association, the twin-engine, long-endurance jet can carry 62 passengers with comparable range and speed to a Boeing 757. But unlike the Boeing, the Tu-214SR is packed to the gills with cutting-edge sensor and communications equipment.


While significantly less is known about capabilities of the 214SR than the E-4B , we do know that it carries an MRC-411 multi-intelligence payload, which includes electronic intelligence (ELINT) sensors, side-looking Synthetic Aperture Radar (to spot incoming air threats from long range), and a variety of Signals Intelligence (SIGINT) and Communications Intelligence (COMINT) equipment. Four onboard generators provide ample amperage while a set of external fuel tanks allow the plane to remain aloft for trips up to 10,000 km.


The two such 214SRs entered service in 2008 with the Presidential Special Applications Squad and are operated by a crew of four. However, the plane was only declassified last year when it made its public debut at the Moscow Air Show. Since then, it’s been spotted in the skies above both the Sochi Olympics, and more recently—and ominously—in Crimea.

Why was the Doomsday Plane circling so close to the Baltics today of all days, and is this nothing but a welcome sign from Russia to the NATO build out in Eastern and Central Europe? And does it indicate that Putin was – as he usually does – either traveling in the vicinity, or is it an omen of something more ominous? 

As can be seen on the image below (courtesy of Flightradar24), after circling for hours just east of the Finland border, it is now en route to land back in St. Petersburg, from where it took off several hours ago.

via Zero Hedge Tyler Durden

Goldman’s Q&A On “Where We Go From Here For Equities” (And Why The Peripheral Europe Party Is Over)

Earlier today, it was BNP which, after launching the first rumors that a QE from the ECB is imminent (it isn’t as Mario Draghi himself explained back in November 2011, but the ECB sure knows how to jawbone idiots to duration death) back in November, admitted it really had no idea what it was talking about and said “there’s now a meaningful risk ECB’s policy May meeting disappoints investors betting on fresh easing” adding that it saw a near-term chance of profit-taking before euro-area April inflation data. Its conclusion – unwind trades that have benefited from expectations of ECB QE such as the wave of unquestionable lunacy lifting each and every Spanish, Italian and Greek bond, all of which are simply trading where they are on hopes the ECB will be the dumbest money buyer left standing.

Moments ago it was Goldman’s turn. In a rhetorical self-QE released by its strategist Peter Oppenheimer, discussing recent changes to long-running market trends, among which the crash in momo stocks, and the EM to DM inversion, the punchline was the most important. To wit: “We see less scope for this peripheral index… Peripheral spreads may narrow further, but more now via higher bund yields. After all, 5-year Spanish and Italian bond yields have converged to the same levels as the US. We still like selected parts of the peripheral markets, particularly the banks, but would prefer to express this via single names than via index overweights…  the drivers of returns may have shifted away from some areas such as US growth and European periphery towards more of a cyclical bias across markets, with a particular focus on exposure to a DM macro recovery.

In other words, while the momentum bubble may have popped (if still has a loooooong way to go before it deflates) the European peripheral bubble is about to go pop as well. For all those who just bought Spanish 10 Years at a record low yield (yes, record low) yesterday, our condolences. Then again, it’s only other people’s money.

For everything else, here is the full Oppenheimer note:

Taking Stock: Rally Driving

The year has so far been a challenging one for many investors. The uncertainty regarding macro data and EM weakness in Q1 has transitioned into a period of rapid momentum damage in Q2. In this Taking Stock Q&A, we describe our take on recent events and where we go from here for equities around the world.

Q: What has this momentum reversal been about?

A: The damage has been widespread, but, as we described in Strategy Matters: Momentum, rotation and the gradual grind higher, April10, 2014, the reversal in performance seen across most markets has been swift, but has manifest itself differently across markets. To us, this suggests that the damage is first and foremost about positioning as opposed to a dramatic change of fundamental expectations.

In the US, it has mainly taken the form of a sharp reversal of the growth/value trade, mainly reflecting the damage in performance to the technology and biotech sectors, in particular. Asia has also seen a reversal of growth/value.

But in other parts of the world, growth/value indices have hardly budged. Europe and Japan are both good examples as the charts below show.

US has seen a sharp Growth vs. Value reversal recently, while Europe and Japan have seen very little change.

Even in the US, the tech sector underperformance has not been very aggressive, but the concentration of positions has been an important ingredient. As David Kostin and team in the US have shown with their hedge fund VIP basket – a basket of heavily concentrated hedge fund positions – the pain in recent weeks has been very significant but has already started to reverse.

Concentrated hedge fund positions have seen a sharp reversal in performance but have begun to rebound

Of course, the damage has not been confined to the US. Japan, for example, has been one of the worst performers YTD (-11% in local currency) having previously led the global rally in 2013. In Europe’s case, the performance damage has reflected the rebound of many EM related stocks (previous laggards) and modest underperformance of the peripheral markets (previous leaders).

EM-exposed stocks have rebounded recently, while periphery stocks have underperformed

In EM, meanwhile, there has been a bounce across the board with prior laggards, such as Turkey, Korea and Mexico as well as China and India, outperforming.

All of this suggests that there has not been a very common theme across the markets during the correction. If it had been about a wholesale shift in investor views about, say growth, one would have expected a more consistent pattern of returns across markets with cyclicals underperforming defensives. As yet, this has not really happened in any consistent or uniform way. As the exhibit below shows, the global averages of cyclicals relative to defensives has not demonstrated any significant reversal, and this is true when we dissect the markets beneath the average too.

World Cyclicals vs. defensives

Q: Maybe not all the returns have been consistent, but one thing that is clear has been the bounce in EM equity markets, as well as other EM assets. Is this sustainable?

A: In our view the general pattern of DM outperformance relative to EM in equities will re assert itself as economic data improves.

A bounce has occurred both in EM markets directly – and the stocks with high EM exposure within the DM markets have also bounced, particularly in Europe (see exhibits below).

But this does not necessarily mark a major turn and indeed some of the strength seems to be fading already. In both cases (direct EM exposure and EM exposure in Europe), the rebound has been very modest relative to the underperformance of the last couple of years.

The rebound in EM is modest relative to past underperformance

While there may not be an imminent setback for EM assets, the better performance in recent weeks has shifted some EM asset valuations, notably FX and rates, more away from equilibrium rather than towards it, particularly in deficit countries like Brazil and Turkey. The rally has also brought equity risk premia down from very high level, leaving equities exposed to any disappointment over a cyclical recovery in China growth or from low US rates (see EM Weekly: A higher bar for the EM rally to extend, April 17, 2014). Also given that the rally was probably triggered by China stimulus and US rates being restrained, and has mainly benefited commodities and banks, these drivers may be fading as our economists see upside risks to rate expectations and the latest batch of China data has not surprised to the upside. That said, we continue to think that differentiation within EM is likely to be a major factor, with some countries with improved fundamentals (such as Indonesia and India) being less vulnerable to setbacks than many others.

Q: So what is your expectation about market direction generally from here?

A: We continue to believe that equity markets will gradually grind higher. The macro backdrop remains supportive. We believe that global growth will continue to pick up through the second quarter and that interest rates will remain generally lower for longer than the market is pricing. Our April Advanced GLI came in at 3.5%yoy, down from last month’s reading of 3.6%yoy, but momentum increased to 0.27%mom from 0.20%mom last month. The reading further supports recent signals of a positive turn in acceleration after six months of slowing growth, and locates the global cycle back in the ‘Expansion’ phase – a part of the cycle that tends to be supportive for equities. Similarly, our March US current activity indicator stands at 3.3%, up from 2.0% in February – broadly in line with our expectation for a rebound from the weather hit of recent months. While Japan’s growth is likely to fall sharply into Q2 due to the consumption tax impact, we expect more policy easing later in the year. Our economists also expect China growth to pick up from around 5% to 7.3% this year as the mix of domestic easing and an improving external environment alleviates some of the extraordinary weakness that marked the start of this year.

These observations are also at odds with the interpretation that the hit to markets in recent weeks has been about a shift in macro views. On the corporate side too, we remain of the view that results are about to improve. We expect earnings to rise this year by between 8% in the US to over 20% in Japan with Europe and Asia roughly in between. In all cases except the US, we expect an improvement in margins as well as top-line growth. It is also notable that while earnings revisions have been very negative in all regions (with the exception of Japan) over recent months, there is some evidence that they are just starting to get less negative in terms of balance between upgrades and downgrades.

CY14E earnings sentiment for MSCI AC World has started to turn, although still negative

Q: So has anything really changed?

A: Not really; we continue to believe that while valuations are unlikely to expand as they have done since the trough on 2009, equities can move higher alongside improved earnings and dividends. If anything, the risk to this view is that an economic recovery drives investors further up the risk curve and forces valuations higher still resulting in stronger markets shorter term, but lower returns subsequently. But on balance, we expect a more moderate but steady rise in equities driven by improving macro fundamentals and profits with the highest returns in Japan followed by Europe, Asia and the US.

Q: What about sectors and themes?

A: We do think that some of the leadership of recent months in the markets will have shifted in favour of value, but largely as a result of exposure to a DM recovery more than anything else. From a leadership perspective, David Kostin and team have argued that similar momentum reversals in the US are typically followed by a change in leadership – in particular towards value (please see US Weekly Kickstart: The stock market, but not momentum stocks, will likely recover during the next few months, April 11, 2014) – but in the US, the value indices are quite heavily dominated by cyclicals (in particular Oil & Gas 14%, Technology 13% and Industrial Goods & Services 11%). Our US strategists still like their operational leverage basket (GSTHOPHI).

Elsewhere, we generally have a cyclical bias too. In the case of Japan, Kathy Matsui and team have kept their sector views largely unchanged, but have increased allocations more toward exporters in anticipation of a reacceleration in global growth. They also continue to focus on domestic demand beneficiaries – a theme before the recent momentum hit – as they see the pause in domestic demand to be temporary; also on the growth theme, they remain focused on industries with strong earnings momentum and capex beneficiaries.

In Asia, Tim Moe and team also have a more cyclical stance (see Asia Pacific 2Q Views: Rebound; favour a three-part cyclical cocktail, March 31, 2014). They favour North Asia including Korea and Taiwan to recoup some of its recent underperformance vs. South Asia as DM growth/rate dynamics begin to shift to North Asia’s favour. They also like China for the cyclical rebound prospects. In South Asia, they prefer India, which is also reflecting its recovering growth. Their recent upgrades of insurance and capital goods and downgrades of Malaysia to underweight (alongside Australia, HK, and Thailand) also reflect our pro-cyclical bias.

In Europe, the recent rotation has largely been away from the periphery towards more EM exposed areas of the market. The peripheral index leadership may have shifted – at least there are some good macro and valuation-led reasons to suggest this. Much of the peripheral outperformance over the past several months was a direct reflection of falling risk premia and narrowing bond spreads.

The outperformance in the periphery over the past few months was driven largely by falling risk premia and narrowing bond yields

We see less scope for this peripheral index outperformance to continue. German bunds are expensive and our bond strategists argue for 10-year bund yields to rise to 2% this quarter. Peripheral spreads may narrow further, but more now via higher bund yields. After all, 5-year Spanish and Italian bond yields have converged to the same levels as the US. We still like selected parts of the peripheral markets, particularly the banks, but would prefer to express this via single names than via index overweights. On EM exposures, alongside our EM strategists, we continue to see the rebound as mainly tactical. In Europe, we have made some moves to moderate our EM underweights -raising luxury goods to an overweight to reflect improved valuations, for example – or because of general cyclical exposure to global growth -as in the case of Industrial goods and services where we are now neutral. That said, we continue to have a fair degree of underweight exposure in EM exposed parts of the market. We remain underweight industrial areas like capital goods, chemicals and basic resources that are likely to continue to suffer from weakness in capex demand from EM infrastructure and commodity end markets. Elsewhere, consumer exposed staples like food remain expensive, in our view, and we continue to be underweight. We continue to focus on the DAX and our DM cyclical exposure basket GSSTDMGR.

All in all, we would describe the rotation as being more a reflection of damage to concentrated positioning than a reflection of a change in market views. As such, the drivers of returns may have shifted away from some areas such as US growth and European periphery towards more of a cyclical bias across markets, with a particular focus on exposure to a DM macro recovery. We believe the market set back in DM has been temporary and expect equities overall to continue to outperform bonds and to resume their rally.

via Zero Hedge Tyler Durden