Strategic Update: The upturn in markets is setting in.


By the end of September we drew attention to what we considered a major bottom established in stock markets (including Europe) accompanied by the cyclical exhaustion in key haven bond markets (Bunds and Treasuries). These important signals where rooted in our long term monitor, a key timing instrument for strategic turns.

Predictably our long term monitor is now about to give identical (if somewhat less strong) positive signals for the Euro-Dollar and commodities (CRB). These are expected to be confirmed over the next couple of weeks.

Fundamental economic analysis is impotent as a timing tool and we rely upon what we call our long term monitor for appropriately timed signals of imminent or impending cyclical turns that anticipate major changes in price trends and subsequently the adjustment of market expectations that tend to follow.

There will be no recession in the United States although growth will remain sub par as a result of the later stages of the long term deleveraging process that started in the summer of 2007 and may not be completed until 2014.

Equally in Europe we see a deep recession in the countries most stricken by the sovereign debt crisis not extending the core countries. Given the considerably larger economic mass of the core of the Eurozone, Europe as a whole will not be in recession.

The intricacies of the processes of political decision making in Europe has often, justifiably, offered the image of consistently lagging events and its piecemeal laborious measures perceived as insufficient to master the crisis.

Market pressure and German insistence on conditionality for bail out packages have nevertheless been two key elements ensuring that however deficient and frustrating Europe has been held together and indeed may have bound itself closer throughout the extremely testing times experienced since 2009.

The package of decisions to be announced tomorrow will in all likelihood elicit some disappointment and fall short of a final solution to the crisis but it will assert that the political will and important steps are being taken and stand a fair chance of marking the point after which the fear of dislocation will start receding.

While an initial disappointment can well be seen we expect that market adverse moves will no longer carry sustainable strength and will tend to be confined to reactive proportions.

We are anticipating that over the next several months equity markets which are still rooted in a defensive position will experience substantial gains.

Capital flows into the key haven bond markets (Bunds and Treasuries) have peaked in September and are set to gradually unwind with yields in these core instruments edging moderately higher.

Substantial risk premiums will remain in distressed European sovereign debt as a rightful reminder that the crisis, if mastered, cannot evacuate the reality that risks will remain and that the process of fiscal adjustment is a long and costly one. Only market vigilance and pressure can ensure the conditions for political will on a sustained basis.