Improvement in oil and US equities but new worries on euro sovereign debt

Posted on 19. Oct, 2011 by Riskelia in Weekly Focus | Comments Off

The latest rebound has been strong enough to modify the landscape of cyclical assets. In particular, the oil markets together with the US assets emerged as clear leaders, specifically the Nasdaq and other defensive sectors (Utilities and Consumer Staples). Meanwhile, the euro sovereign debt risk has deteriorated, specifically the French and Italian debts in the wake of a generalized rise in OECD sovereign bonds yields.

The rebound has started to highlight clear leaders better identified by a strong trend than the mere magnitude of the rebound. Indeed, the trend underlines the robustness of the rise over a diversified horizon in a period ranging from one month to two years.

The US assets stand out in this regard, above all the Nasdaq, the Utilities and the consumer staples sector. Besides, the oil markets have improved markedly, specifically the brent and the diesel complex (Gasoil and Heating Oil) whose resilience we previously emphasized. The better oil outlook is supported by an improved trend on European oil producers. Some defensive sectors in Europe distinguished themselves, notably the Food and Beverage, Health Care and Telecom sectors.

Yet, the rebound came along with a generalized increase in OECD Bonds yields. As a matter of fact, the French 10 years yield jumped 40 bps whereas the Italian 10 years yield rose 27 bps in the last week. As showed by figure 3, the 5 years yields spreads vs. Germany reached historically high levels last week. The synchronized defiance towards two core euro zone bonds will represent a major hurdle to a sustained rally in Eurozone equities.

In summary, some cyclical assets have evolved promisingly making a global financial outlook improvement possible. Yet, the damage caused by the parallel rise in yields could harm the euro zone stability should this pattern continue as it would be self-destructive.

Figure 1: Largest Riskelia’s trends evolution over the last week

The Trend Indicator represents the net proportion of trending systems going long or short.

50 trend following systems with a horizon of 3 to 24 months watch every asset.

Figure 2: Riskelia’s recommendations on US and European sectors ranked from the weakest to the strongest.

Figure 3: Italian and French 5 years yield spreads over Germany have inexorably widened in a synchronized way

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