It's A Binary World Now: i.e., Risk On or Risk Off

Centering on U.S. stocks, equity markets managed a good rally last week from temporarily oversold levels, but it is still too early for an "all clear" sign. Some brave souls in the U.S. were confident enough to state that lows in the S&P 500 have been seen for the year, but we are not ready to bet the farm on such a call, and neither are the hedge funds, it appears. Trading has become binary, i.e., its either all risk trades on (developed market stocks, emerging markets, commodities, high yield debt and commodity currencies) or tin hat trades, i.e., USD, L-T U.S. Treasuries and gold?with JPY and Japanese equities drawing incremental amounts of haven money as well?China in JGBs and European investors in equities because of the good performance seen YTD as far as Euro-based investors are concerned.

While investors appeared more sanguine about Euro sovereign debt and disappointing US employment numbers last week, these and other issues such as the lack of demand in the U.S. housing market have not gone away. The IMF upgraded its global GDP outlook for 2010 GDP but downgraded their outlook for Euroland, emerging markets and Japan in the process while ironically upgrading the U.S. and China's outlook, two areas of more concern as regards the growth scare.

The media polls in Japan are showed another roller coater ride regarding voter support for the Naoto Kan Cabinet and the DPJ on the eve of upper house elections on Sunday. The expectations were that the DPJ would lose their majority, and that is exactly what happened. While the domestic and foreign media saw weaker bonds, a weaker yen and weaker stocks as the market reaction, stocks were actually a little higher mid-day on Monday (+7.2 points) and JGB yields were a little lower (-0.015 points to 1.140%)--i.e., market response was largely muted. While it will now be harder for the Kan Administration to get legislation through the Diet, economic policy was at best muddling through before the elections, and should continue to muddle through after them.

Foreigners over the past two weeks have again become slight net sellers, after a week of buying in the third week of June. Trading volumes for all investor types however are anemic and there is little conviction in either direction?implying that we could continue to waffle for the foreseeable future but not break down decisively below prior February lows, or in other words our "correction and a fairly narrow trading range thereafter" scenario.