In lieu of yesterday's monolithic moves across the spectrum of markets we cover, Deutsche Bank's Head of Credit Strategy, Jim Reid drops a Rosetta Stone on the real motive of the SNB's contradicting decision to strengthen the Franc, while lowering rates deeper into the NIRP abyss.
Volatility is something we place great emphasis on when making investing and trading decisions. This is something we have arguably been neglecting here at Business of Finance but plan to go into depth once time permits.
Again, as we've mentioned, this coming week's ECB announcement on monetary policy are what the markets will be anticipating from the get-go. Mario Draghi better not disappoint.
Today being the first day of June, and the start of the last month of the first half of 2016, we thought it would be aptly appropriate to list down some of the biggest event risks that June will bring. These are the known unknowns — uncertainties which we already know about but not their outcomes.
The biggest risks in June (in our opinion) will be the EU referendum by the UK in the later part of the month, the June ECB monetary policy decision and press conference, the June FOMC statement and interest rate decision, and lastly the BoJ's monetary policy decision.
We feel markets will likely be most sensitive to these types of events, having chopped around for almost half a year now. There is great anticipation for guidance on where to go next, and we feel markets will likely take cues from central banks, chiefly the Fed.
It seems like more and more of the big names are turning bearish on risk. Day after day of directionless trading, huge intraday swings in the equity markets, and a very confusing macro backdrop has bred a lot of frustration amongst investors and traders, ourselves included.
We ardently advocate staying on the sidelines because we just don't know what is going to ensue. Yes, we have our own biases (with whatever we discussed about here, here, and here) but these biases aren't going to be beneficial in anyway unless the markets start trending again, which at this point is highly unlikely.
The number one principal for both small and big players would then be to preserve capital and ride out the volatility.We prefer to stay very lowly exposed or not exposed at all.
More and more are jumping on the "sell in May and go away" bandwagon but for good reason. As U.S. stocks base around in short term trading awaiting more cues about a potential June rate hike from the April FOMC minutes to be released later today, the big players have their eye on the bigger picture.
This is something we've talked about on these pages, and something we buy, on the caveat that technical factors turn conducive. The month of May has historically heralded volatility in the financial markets.
The key takeaways from Goldman are: Overweight cash, avoid equities, look to profit from up in quality carry, and perhaps buy some volatility.
With the stock market heading no where for the last 4 months of this year, it is high time we took a step back and view things from a systematic angle. As we approach the "sell in May and go away" phase of the year, equity returns are looking more vunulrable to adverse shocks, and flares in volatility.
YTD, the S&P 500 is almost unchanged, down marginally. Bonds (quality) and commodities (short USD) have been the best performers for the last 4 months. Vol of vol (VVIX) has remained elevated but is not yet deemed to be at alarming levels. What's in store for us may be a surprise. Or actually maybe not.
When we piece this puzzle back in a way BofAML calls the "3P's of Positioning, Policy & Profits", we can come to the conclusion that the risks are skewed south, and things could turn uglier very promptly. Therefore, it may be wise to expect very moderate returns from equities. One may wish to overweight cash, bonds, and gold while avoiding equities and non-IG corporate credit.
Technology and mass robotization are probably the single biggest threats to our jobs. Jobs of both the blue and white collars are gradually being replaced by robots that are much more cost efficient and productive. Plus, robots have no want for minimum wages, or hold strikes in protest for what is now a huge skill deficiency in the labor force across the world.
So will politicians and central planners dabble with the risk of upsetting the status quo for a potential change in direction? Unlikely.
Rather, Janus Capital's Bill Gross believes central planners will stick to what they have always been best at: Printing money (QE), lowering interest rates or bringing them sub zero as we've seen recently, and fiscally stimulating economies with debt funded programs thereby creating a false impression of prosperity when there isn't.
"30-40% of developed bond markets now have negative yields and 75% of Japanese JGB’s do" is how Bill Gross likes to drop some perspective onto the world that has become so numb to the new age central banking tool known as NRIP, or negative interest rate policy. It's absolutely perverse, and it's everywhere like how Vampire Squid has its tentacles all over political campaigns in America.
Business cycles have become so influenced by asset price inflation, or in some cases deflation, that they have lost a good deal of traction with the more traditional Keneysian theory of aggregate demand and aggregate supply.
Gross ultimately warns that if global economies continue to merely drift on stagnant waters, failing to see a breakaway renaissance in output growth, we might be in for a rude awakening when the chickens come home to roost. Eventually they shall.
Read that again. Does the title make any sense? Just how did the ECB murder euro shorts with even more easing?
The ECB has made its move this week. Even lower negative interest rates, more QE, and rhetoric that should all else equal send the euro tumbling to new lows.
But exactly the opposite happened an hour after news hit the wires. Baffled yet? Well, most traders were. The stupendous volatility this single event has brought to the financial markets is difficult to overstate.
Contrary to intuition, the euro (EURUSD) is some 420 pips north of Thursday's lows, making this one of the largest and most brutal intraday reversals we've seen in a long while. Yields on core European sovereign debt are all higher, instead of lower. Such moves make little sense considering how much looser monetary policy is now in the Eurozone. Or does it? Let us explain.
2016 is shaping up to be like the latter half of 2015 but with a lot of additional dynamic forces warping and twisting the financial markets. Higher than average volatility has been the common theme so far but we're also noticing an incredible rapid shift in cross asset correlations. All this means that the current market environment is extremely rough, giving traders (ourselves included) a hell of a hard time.
It is no surprise that this is indeed the case. Policy uncertainty amongst central banks, oil prices that are stick in a moribund rut, very idiosyncratic technical flows that have caused traditionally lower beta assets to trade like mad donkeys, and of course the deep polarization of sentiment across the board.
It is on this note that we turn to JP Morgan's quantitative desk for answers, albeit nebulous. The desk analyzes markets in a less traditional manner, approaching this landscape with mathematical and technical tools most retail traders have zero access to.
It's been an extremely busy first week of 2016 for Business Of Finance. Global markets are in a state of frenzied chaos, much like a chicken running around without its head.Only this time every risk asset has been sold with reckless abandon while liquidity is conversely bid to the moon. Anyone who shorted risk, went long volatility, and stayed in cash since Christmas week would be gleefully grinning at the poor folks who are trapped in 2015's outdated ideologue
While we are hard pressed for time, we feel we need to put this piece out to give readers a first glance of what 2016 might be like for the markets all across the world. We have a feeling 2016 may be markedly different from the past 5 years where cash might actually be the best performing asset. Yes, being in cash is a position in and of itself.
In layman's speak, you ether go big or go home in 2016. At least that's what we think. You could make a hack a lot of profits or loose your shirt in the kind of markets we've been greeted with so far. So buckle up, sit tight, sell risk and buy cash.
Central banks aren't stupid, they're just stubborn. The unintended consequences, a palpable word for not heeding the lessons of history, of zero bound rates have never been further reaching.
Businesses lose foresight they used to have. Savers and pensions suffer the most because savings cannot earn a high enough return to justify the value of time and opportunity costs. It's all about the yield curve, which has never been as flat as it is today.
Things have gotten so out of whack that even Gross himself openly admits that the 'necessary' changes will most probably not be effected. Entire financial systems have been built on this new paradigm.
Unfortunately for the real economy, this new paradigm has hindered long term economic growth and stability. Will anything change? Perhaps not.