The latest big picture observations from one of the original skeptics: Bob Janjuah.
Bob's World - Vigilantes bite back
The themes I have been highlighting all year certainly seem to have played a major role in driving markets over the past two weeks:
A. The bond vigilantes did their job with respect to Italy. While Greece, Portugal and Ireland are, in my opinion, insolvent nations that need debt relief or restructuring, it seems clear to me that the market does not want to attack Italy out of any speculative spite. As long as the sensible fiscal policies of the last decade are further built upon, I am confident Italy can exit the eurozone debt crisis in acceptable health.
B. The 8 July jobs report told investors all they need to know about the weakness in DM growth. I am very confident that both DM and EM growth will only get weaker as H2 unfolds. But in the near term I think a combination of a "fudged" US debt ceiling agreement, more talk of stimuli in the form of QE3, a genuine push by most Italian policymakers to back Mr Tremonti and implement the required fiscal adjustment, and a little more of the Q2/Q3 Japan bounce, will together be viewed, at the margin, positively by markets. But I would expect this to be only a short-lived reprieve.
Therefore, in terms of markets:
A. Although I think the current risk-off phase could last a little longer in the very short term, for the latter half of July and heading into August I am bullish and favour another risk-on phase. In this coming risk-on phase I expect to see over late July and August my S&P targets are 1350/1370, with a possibility of a bigger move to 1440. And 1250/1220 S&P remain my bear alert levels.
B. Over a Multi-Week/Multi-Quarter horizon, I remain bearish and risk-off, as outlined in my previous note. I have high conviction on this call.
C. Any surprise will likely come from the US rather than the euro zone and centres on the risk of no deal being reached on the debt ceiling. If that becomes the market consensus over the next few weeks, then my 1250 and maybe also 1220 S&P bear alert levels should come into play. I think USD and USTs would rally if the debt ceiling deal were not to materialise. The knee-jerk reaction may be to sell USTs and USD, but no deal on the debt ceiling would I feel ultimately send a very positive message to the bond vigilantes that the US is serious about getting its fiscal house in order. Risk markets on the other hand would likely see such an outcome as ultimately very negative, as uber loose policies have been and are the main support and driver of risky asset valuations. At this juncture, however, I see a short-term fudge as the more likely outcome.