We are increasingly of the believe that this market is driven by a NEED FOR POSTIVE RETURNS in the stock market...... meaning the market will be up in Q4 ...to safe-guard Obama waning domestic political support.
We now need to find the likely paths for this, but it could include some downside initially followed by big demand below (minus 5-10% from here)....as there are too many shorts or neutrals around....but it is important to realise the stock market is "artificial" it has nothing whatsoever to do with overall fundamental economy (which is still weak) but all to do with a move out of EXTREME DEFENSIVE stance by most prof. investors - hence the market moves are driven by allocation models more than new incoming data. Note this or you will lose a lot of money this Q3 and Q4.
We, the old macro guys, remains sceptical, but we are also ALL OF US, acknowledging this could go on for longer than we like as it would be political suicide if Obama also had to deal financial crisis 2.0 in this autumn.
In order to balance this out he needs better, stronger markets .......at the same time Bernanke will go quiet over the summer as his reconfirmation process starts in earnest.
The FOMC statement yesterday was clear signal to market:
Listen, the tail-risk is now dealt with (super gloom scenario) , but we are still in the left-hand side of the normal distribution.
The economics indicators on a "leading level" is positive, but the gap between "expected" and "realised" economic growth is still big, and growing (as seen by rising unemployment and output growth)......but more and more investor is joining the chorus of: This is sustainable, this is good...
This speculator is still cautious after poor June/July performance for the strategy, but we are fighting the urge to short, and remain constructive on stocks.
In FX-land the market decided the small exit from QE shown by FED was less important than the RISK ON sign that camed attached. I remain constructive on US dollar, but we will need some action inside next 24hrs.......
Still long DBA...otherwise strategy is to remain 100 pc flexible....