Risk On Redux

Isn't it odd that talk of China tightening capital requirements (again) spooks everywhere except China? But that's what happened today. While we were busy scratching our heads about that one, the German and Eurozone PMIs came out well ahead, and this proved enough to stop the market questioning, and instead just jump on board the rally train. I think there may also have been some reasonable attention paid to a UBS strategy piece today which upped its Euro growth estimates and is upbeat on H2 revenue growth. We have seen a large "risk on" this morning as Europe rallies 2.5% from the lows. Volumes are strong today; c125% and I assume that is due to expiry later today because it's certainly not a result of news flow. The oil price starts with a 73 now and the dollar has taken another fall after recently failing to break out of its downtrend.

UBS has continued to rally like a bank possessed (or maybe exorcised is more apt) as the allocations/demand ratio was paltry. Whether its people scrambling to cover shorts or add to longs I don't know. It never looked a wise option to be short of this one given how well it held up in spite of an extremely well telegraphed placing.

While the market, as mentioned yesterday, has been range bound of late for sure, much to the chagrin of trend followers, I think it's interesting to note individual stories have caught traction and strong themes have developed. It's almost like it was back in the halcyon pre Crunch days. For example, the sugar names have continued to climb on the lack of monsoons in India. Along similar lines, the fertilizers have continued to underperform. We're starting to see the utils gain traction, one which makes sense to me as the central banks continue to be very dovish, Merv in particular of late and the yield plays become attractive, especially if you believe September & October could be tricky months for the markets. UBS is another one, I didn't speak to many yesterday who were going to flip their stock, the vast majority were holding on.

Before we get too carried away with the return of the Prodigal Bull Market, let's sign off with some perspective giving thoughts from David Rosenberg…

WHAT THE MACRO LANDSCAPE LOOKS LIKE AT THE MAGICAL 49% RALLY IN THE S&P 500?Historically, let’s examine what the macro landscape usually looks like at that magical +49% point in the equity market rally:

• Real GDP had expanded on average by 4.5%
• Employment had rebounded an average of 850k
• The ISM had firmed to an average of 56.2 (the lowest print by this juncture was 53.9)
• Corporate profits had recovered 12%
• Bank lending rose an average of 5%

Compared to today, the market is way ahead of itself because as of the latest data points during this 49% rally:

• Real GDP is trying to make a cycle low
• Employment is trying to make a cycle low
• The ISM is off the low but still sub-50 at 48.9
• Corporate profits are still trying to make a cycle low
• Bank lending is still trying to make a cycle low
• The equity market right now is priced for 40% profit growth and 4.0% real GDP growth in the coming year