NN IP: Sour mood persists

Markets for risky assets continued their move downwards until yesterday, when US equity markets rebounded by more than 2%. Still, over the last five trading days most DM equity markets lost between 1.5% and 3.0%.  Global real estate is also about 2.5% lower compared to a week ago. Spread markets did better, with CDX index spreads relatively flat for DM markets and slightly wider for EM.

Our small underweight stance on equity is party driven by weaker macro fundamental signals. Macro data came in relatively flat during the week with emerging markets starting to outperform developed markets. However, fundamentals are not just a direct driver for market movements, but are also translated through the behavioural channel. Our news-based big data indicator shows that sentiment on macro fundamentals is currently very low (see Figure 1).

Markets for risky assets continued their move downwards until yesterday, when US equity markets rebounded by more than 2%. Still, over the last five trading days most DM equity markets lost between 1.5% and 3.0%.  Global real estate is also about 2.5% lower compared to a week ago. Spread markets did better, with CDX index spreads relatively flat for DM markets and slightly wider for EM.

Our small underweight stance on equity is party driven by weaker macro fundamental signals. Macro data came in relatively flat during the week with emerging markets starting to outperform developed markets. However, fundamentals are not just a direct driver for market movements, but are also translated through the behavioural channel. Our news-based big data indicator shows that sentiment on macro fundamentals is currently very low (see Figure 1).

This week, we decided to upgrade commodities from neutral to a small overweight. Commodity demand growth will level off as global growth levels off but is still above trend. Meanwhile, emerging markets macro surprises improved, and Chinese infrastructure spending supports industrial metals. Strengthening EM currencies imply more supply discipline and less demand fallout. We have witnessed supply discipline in industrial metals with low prices moving inside the cost curve. Metals inventories are falling and physical premia are on the rise. Global grain stocks of corn and wheat are declining. Supply risks dominate in oil given the loss of Iranian barrels and declining Venezuelan production while rising Saudi and Russian production eat into spare capacity. Refineries are entering their maintenance period with low Brent refining margins and backwardation in the oil curve attracting investors.

Looking at the behavioural side of the equation, the speculative positioning in commodities is low to outright net short in gold, silver, soybeans and wheat. Typical US-China trade-exposed sectors like industrial metals and agriculture are no longer underperforming, which indicates that protectionism is substantially priced.