Steen's Chronicle: Pause in asset inflation?

We have taken profit on what we consider the 'tapering re-pricing' which happened last week after the Federal Open Market Committee decided not to start reducing its asset purchases. Now we are looking for a small correction which we will manage by shorting the DAX and the NASDAQ.

Preferred path
Our preferred path from here looks like the chart of the NQ-100 below which we ultimately want to go short big time when this cycle ends in late 2013 or early 2014:

 

_{Source: Bloomberg}

Apprehensive re. next month
We are apprehensive about the coming month due to several factors:

·         The expected fourth wave correction down

·         The seasonal weakness in September/October (see below)

·         Fund managers and pundits who constantly say that Europe is cheap?

The latter is personally what scares me the most - cheap relative to what?

Yesterday, a UK-based manager even tried to convince himself (certainly not me) that Europe has the lowest foreign trade/exposure of any major trading bloc. Where do these people get their information from? Starbucks, perhaps?

_{Source: seasonalcharts.com}

More QE, less growth, less inflation and less upside
Finally, I have mentioned a few times how I see the fourth quarter having a dramatic slow-down effect, mainly due to unemployment rising, but also due to a serious drop in US housing activities. Please see the chart below. It clearly shows not only why housing will fall (correlation with a lag of mortgage rates) but also why we will see more quantitative easing (QE) rather than less.

Tapering will not happen in October or in 2013 for that matter. Not a single economic vector in our model is pointing up. All indicate less growth, less inflation and less upside. The problem? The market is still talking recovery, despite the US this year being barely able to muster 1.5 percent growth after 2.5 percent last year. If this is recovery, I don't want to experience recession.

_{Source: Thomson Reuters}

Non-tapering changed fixed income's relative value over equities
Again, we are increasingly confident about our 2.25 percent 10-year US bond rate call by the end of Q4-2013 versus 2.65 percent now. The Federal Open Market Committee's fixed income put issued by the Fed's recent non-tapering act has changed the relative value of fixed income over equities. This story has only just begun.

Market focus
I remain 80 percent long fixed income in my Beta portfolio (Bunds, US 10-year (IEF ETF) and Danish 1.5 percent 10-year government bonds).

Alpha-wise, increasingly my Gold calls still see 1525/75 before falling again, and finally I continue to play the US dollar short as the path of least resistance will be a lower US dollar to help refuel emerging market currencies.

I am off to Slovakia.

Stay safe,

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

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