JP Morgan still cautious on equities despite weakness in US dollar

The recent correction in stocks was not a buying opportunity, JP Morgan told clients at the start of the week.

Despite the increasing number of market-watchers with negative views on the market or so-called 'bears' and the spike in the proportion of stocks which had entered into a 'bear market' - to over 40% - the broker said it would remain cautious until it saw a stabilisation in economic activity.

Unfortunately, strategist Mislav Matejka said he was seeing the opposite: Citigroup´s economic surprise index had hit its worst level in two-and-a-half years, lending standards in the US had tightened for two quarters in a row and the weakness was starting to become apparent in the services sector too.

As if all that were not bad enough, the flow of data out of China appeared to be rolling over again and the best indicator of 'momentum' for the Eurozone, the M1 monetary aggregate, was peaking.

There was a grey lining however, in so far as the turn in the US dollar might help commodities - but not the broader market - because it was the "direct result" of weaker activity, Matejka said.

Indeed, the rollover in the US dollar might not continue due to the still extreme interest rate differential between us Treasuries and bonds from the rest of the world, the strategist said - despite the prospect of interest rate hikes from the US Fed having been priced out.

JP Morgan´s FX strategists were still forecasting that the trade-weighted US dollar would appreciate by 2.5% by mid-year.

"We think it is premature to look for a market low from the medium term perspective. The key sectors to own in the current backdrop remain Telecoms and Utilities."