The formerly leading Nasdaq index has been lagging behind the broad US market which might mean some flow rotating to smallcap (RTY) since it is taking the lead lately. During the last month the markets didn’t reward taking risk on either side of the tape, none of the main geographical areas provided definite trends.
According to the EMU periphery bond markets their crisis is way behind us but the EU growth will stay subdued for a longer period of time, especially if current geopolitical tensions remain.
I can say that I’m still optimistic on US equities because the macro data indicates that the overall growth is strong enough even though the monetary policy changes will introduce volatility. The European story is much more fragile as we have been able to see the DAX tumbling on worse than expected Chinese data – and we have yet to see the bulk of it, I suppose.
Latam honestly surprised me this week, they erased their losses compared to global EMs however I’m trying not to read too much into it because they haven’t broken out of their downtrend yet.

Somehow it feels like equities are running out of steam so noise will make it harder to predict market movements now more than previously.


The correction has been almost completely erased but it is a bit worrisome that core bond yields didn’t climbed back to their previous levels when equity indices were at the same levels as they are now. If we assume the subdued yields are the indicator of lackluster growth then it is not a good sign for equities.
Another interesting development was the pickup in gold where a downtrend might had been broken – I think it might be mainly because there is a huge amount of liquidity in the system and with some growth the inflation will most likely edge up in the world.

After months of huge outflow – which is still going on – the global emerging markets have been able to significantly advance and keep the pace with core markets. Based on surveys it hurts most investors due to huge underweights so there is still upside.

It’s a quite strong conviction to be bullish on EU stock as I heard nowadays from market participants and so far this year backs the idea. Emerging markets are still suffering and I think it will be the same way through the year.
The other day I stumbled into a site which showed the tallest 20 buildings completed in 2013 and more than half of these skyscrapers were built in China. One can read about high vacancy rates, domestic financial market problems, bubbles and whatnot so I compared the main Chinese indices to consumer biased funds and their performance were amazingly different in the last 9-12 months. The gap actually goes above 20% in a lot of cases. If we believe the market prices the right way then a 7%+ GDP growth might be a bit exaggerated given financial and real estate sector gives a huge chuck of the main indices. I wouldn’t be surprised if multiple downward revisions would be presented in the coming months. An other side of this thought could be the relative underperformance of consumer discretionary sector which had one of the best runs out of any other sector. Just compare the SPX and VCR:US in any timeframe and in 3 months.

Tapering, new Eurozone member, record low core vs periphery bond spread in the EU, descending commodities… All sorts of news and yet, the main equity trend stayed the same – developed markets are going up. There are only slightly interesting news in the big trend.

Usually there is no point to think too much into one day’s price changes but the magnitude of Monday might have proven again that a 3-8% drop in the main DM equity indices are just solid entry points.

It is the time of the year when financial sites are full of recaps and forecasts about the market. One of the most important stories for next year might be some steam in currently subdued inflation. The financial asset prices clearly benefited from loose monetary policy and the chunk of fiscal tightening is behind us so this anchor no longer does its job. The combination of idle governments and reemerging growth can bring us higher than expected price appreciation. If it’s true then borrowers will benefit from it – higher the growth and inflation are, the less attractive bonds get.

The European stock market was a heavily overweighted sector in a lot of portfolios but the last couple of days have proved these investors wrong. The European indices busted out significant losses compared to US (still resilient which is a good sign) despite the adequate new macro figures – hell, even global emerging markets outperformed the core EU. The only optimistic sign is that the periphery yields have been hovering around their multi-months lows.

Yields have been increasing lately and most periphery currencies are shoving vulnerability which mean a slow pricing mechanism of upcoming tapering is on the way. This seems like a way more believable trend than the sudden market movements we saw during the summer and I think it will continue in the following months.
With two consecutive negative days the Stoxx600 is around a one and a half month low. US is more resilient as per usual but with higher rates the stock indices might get under pressure because the yield difference will erode so equities most likely won’t perform as well as they did so far this year.

Since WW2, European nations have been working on deeper integration and after the fall of socialist regimes, Europe looked like it has a real chance to establish probably the greatest union this continent has ever seen. There are a lot of cracks and flaws in the system however I strongly believe that each participants benefit from it – even the net contributors. And when the push will come to shove, every decision maker will act knowing that.

Insanity goes on…

I like drug market related articles because they show how market dynamics can’t be denied even in illegal, hostile environment:

“A peace deal between FARC rebels and the Colombian government would greatly help cut cocaine production in Colombia, but officials fear new crime gangs could fill the gap while anti-narcotics police fight a new scourge: synthetic drugs.”
Lesson #1: Supply and demand gaps will be filled.

“They are easy to produce in any place; you don’t need big laboratories. You can produce synthetic drugs from your home. Certainly they will attract a lot of world attention.”
Harder to track the production chain because it doesn’t require agricultural cultivation so more smaller cartels might emerge (win or lose?).

“A gram of cocaine costs about $10 in an upscale neighborhood of the capital [Bogota], while an ecstasy tablet can go for more than $90, according to police officials.”
It is the other way around in Europe which means cocaine production is a pretty cheap process and the shipping + risks multiplies the price while the product reaches the customer. If synthetics gain market share then the agencies might face a harder time to fight it since the ingredients areĀ  accessible (I’m assuming) and with a handful of chemists the gangs can set up shop anywhere which will put a pressure on the price as well.

One geopolitical tension eases, an other one gets more tense.

Thankfully the Swiss voters still have some common sense and respect for the open market. States shouldn’t have a say in how much a private company is willing to pay to its employees.

The equity indices went nowhere in the last month, not even the liebling European equities. It feels like the holiday trading has already begun.

What now? That was the closing sentence after almost every conversation lately when I tried to pick someone’s brain about the near future of stock market. Most people sounded cautious so probably they still have money on the sideline which hurts if the markets keep rising. And the market has a tendency to go where it harms most participants. Don’t get me wrong, I would place a large bet on that the stock indicies will underperform in 2014 compared to 2013 (little bit risky bet considering there is still a month left) but a great number of people are trying to pinpoint those short period of turbulent times when one hit wonders are made. These folks strive to make it to the headlines instead of becoming successful persistence hunters. Product of a recent crisis, I guess.

Demographics is an important factor for a nation long term and France + UK are ahead among the most populous nations. Germany on the other hand will face a short supply of labor force so ceteris paribus this economy will create the gravity to attract the highest skilled workers in the future and the immigration will make great positive impact. (