From RBS' Bob Janjuah
Plse refer to my most recent comments, from 24th May, and 26th April. Things are playing out nicely. This is just a 'tactical' update. In my cmmt of the 24th May I set out 2 possible paths for the new bear market we are in, and I want to clarify a little:
1 - 1st, the bigger strategic theme is clear and unchanged - global growth HAS peaked and the deflation trend is clear for the next 3/6mths. This is strategically bullish the USD and USTs (think 1 vs the EURO, and low 2% 10yr yields). And this is strategically BEARISH risk assets (think mid-800s S&P in 3/6mths, and the iTraxx XO index up above 750bps). The strategic asset allocation outlook STRONGLY favours QUALITY as defined by balance sheet strength, balance sheet transparency (which therefore excludes most financials), market position, AND the ability to be a price setter (not taker).
The game changers are: A) a massive turnaround in China towards new stimulus & a new credit creation binge etc - for now very unlikely IMHO; B) a massive turnaround in corporate behaviour resulting in a leverage, capex, investment, hiring & spending binge - extremely unlike for now and for the rest of this yr; C) a new US fiscal package (pretty impossible now), so the most likely and only really viable remaining option is a MASSIVE DEBASEMENT/MONETISATION move led by the Fed (but no doubt globally co-coordinated) thru the announcement of a NEW (say) USD5trn QE package, aided/abetted by maybe another USD5trn of funny money printing by the BoE, the ECB, ther BoJ, the PBOC, the SNB etc etc.........HOWEVER, I don't expect this last bullet to be used until things get REAL UGLY (see above para for levels). If u know u have only 1 bullet left in the rifle - and unless you are amazingly stupid - u don't try to shoot the charging grizzly bear when its 50 yards away. No, you wait till its 5/10yards away...WHEN we get this final bullet out of the rifle it had BETTER not miss, as if it 'misses' we would then have the mother of stagflationnary busts in history where bonds get crushed due to debasement, taking risk assets out with them too. If this is the outcome - and this is really I think a late 2010/2011 story - then trust me, 2008 really will seem like the Good Old Days.....lets hope Uncle Ben not only has the rifle ready, but also that his scope is well lined up and that he has been practising hard...
2 - In terms of the shrter term tactical outlook, of the 2 scenarios laid out in my last piece, I now marginally favour the 'bullish June, disastrous July/Aug/Sept/Oct' outcome. This is a marginal call - the KEY trend for H2 2010 is BEARISH and HIGHER VOL - but I do think we can see the S&P (as a global risk proxy) up at 1150/1180 in June. This seems to me to be the next and an excellent place to get short risk/get long deflation. A move above 1180 IS possible but unlikely, with 1220 even more remote. However, I would be inclined to rethink a little the precise tactical timing/routemap IF we can get to and close above 1180 for 3 or so consecutive days. A break below 1020 on S&P would indicate that 800s S&P is coming sooner rather than later, but as mentioned, I think this is now business for JULY onwards, not for June.
It is important not to forget that we now have a pretty cool series of lower lows & lower highs on stks whereby we have taken out the early Feb lows. And if u like this sort of thing, a very powerful and ultimately deeply bearish Head & Shoulders is clear too.
So there u have it. Expect policymakers, the sell side consensus and the media to be Rah Rah over the next few days & weeks (its already begun). But don't get too sucked in - use any bull trap to OFFLOAD risk/to get liquid. JUNE can be a decent bullish month, but I really do think it is the eye of the storm ahead of a super nasty Q3/early Q4.