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The Biggest Event Risks In June

The Biggest Event Risks In June

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.

Deutsche Bank: "We See No Further Upside For European Equities..."

Deutsche Bank: "We See No Further Upside For European Equities..."

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.

Expect Nasty Volatility & Shocks This Summer

Expect Nasty Volatility & Shocks This Summer

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.

Bill Gross: Careful Of What You Wish For With Negative Rates

Bill Gross: Careful Of What You Wish For With Negative Rates

"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.

What The Smartest Minds Think Of The Current Rout

What The Smartest Minds Think Of The Current Rout

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.

Are Money Markets Warning Of An Unknown Unknown?

Are Money Markets Warning Of An Unknown Unknown?

It has been deftly espoused that there are two types of unknowns - known unknowns and unknown unknowns. And because risk is most commonly associated with uncertainty (i.e. unknowns), there are some risks that can never be completely hedged against - unknown risks.

Earlier last week, the 10-year swap spread went negative for the first time since 2010, making this one of the only 4 occasions since 2007 that spreads have defined financial gravity. The 5-year swap spread is on the verge of being negative, which if happens would make it the first ever in history.

The take away condensation for readers would be to prepare for unknown unknowns. 7 years of zero interest rates have distorted markets and their pricing engines on an unimaginable scale. Models that price risk, and dictate where billions of dollars flow into on a daily basis have been so badly screwed by artificially suppressed borrowing costs that a positive shock to the system knows no bounds.

Plainly said, we don't know what to expect. You can't hedge a risk you haven't yet seen. Be cautious!

Bill Gross: Worry About "Return Of Capital" Instead Of "Return On Capital"

Bill Gross: Worry About "Return Of Capital" Instead Of "Return On Capital"

In this month's investment outlook, Janus Capital's Bill Gross warns about the mounting stresses in the global financial markets and why you should be much more concerned about the return of your capital, than the return on your capital.

Clearly for the bond king, size does matter. The size of recent market movements, during a time when most central banks in major developed markets have stopped their balance sheet expansion programs, is telling us participants that all is not well and that there may be something lurking behind the shadows.

Gross talks about how nearly 8 years of zero bound interest rates and QE have led to a global economy that is now so out of whack it would take a shock, in the form of secularly higher interest rates and borrowing costs, to fix. But therein lies the rub. Markets get absolutely spooked on any mention of a rate hike or a cut back in existing expansionary monetary policies (ECB, BoJ, PBoC, ect...).

 

Goldman's Take On Enhancing Returns In A Yield Deprived World

Goldman's Take On Enhancing Returns In A Yield Deprived World

Traders and asset managers across the world have found themselves in a market deprived of yield. We have our central bankers and their policies of zero or negative interest rates to thank.

The quest to find every marginal basis point of return has led the smartest minds to venture where few dare to. There has perhaps never been a time with this abundance of money being left clueless on where next to pour into for that extra basis point of alpha. This scares us.

There are various ways in which zero-yielding cash tries to gain alpha. One such way, and one which we feel has been one of the best and most consistent strategies to enhance returns, is to sell short-term volatility (vol) on U.S. equities.

This often misunderstood and underrated strategy has generated an impressive overall return through the last decade. The consistency of this strategy is what attracts us, along with its relative simplicity both in theory and practice.

Bill Gross: "Nightmare Panic Selling" Coming

Bill Gross: "Nightmare Panic Selling" Coming

When Bill Gross speaks, the markets better listen. At Business Of Finance, we reserve a great reverence for Mr Gross not only for his adept ability to foretell mega trends in the financial markets, but also because the man has a rare talent in piecing everything together to form investment thesis that have proven to work well.

Retail investors and traders now have access to very complex financial instruments such as bond fund and volatility ETFs, and more recently funds that are synthesized using cross currency total return swaps on extremely illiquid markets such as a ferrous commodity contract that trades on a futures exchange in China.

Bill Gross' latest investment outlook titled "It Never Rains In California" delves into the reasons why the bond king believe a fat tail may be in the making, and why investors and traders should be prepared for it by having enough liquidity when the boat tips.

Do retail investors and traders really know what they have involved themselves with? We hope so, but logic tells us otherwise.

April Review & Looking Forward (Part 2: Strategy)

April Review & Looking Forward (Part 2: Strategy)

In Part 1 of this note reviewing the eventful month of April, we spoke about how the tide was shifting in many of the developing economies with Europe's economy and financial conditions showing good signs of improvement while the American economy was undoubtedly slowing. We also spoke about macro economic cycles and how such polarities in the major economies have created exclusive opportunities in the financial markets.

With the current market climate hallmarked by panic, fear, and ephemeral swings, we have detected a couple of opportunities over the last couple of weeks that look promising in their own rights. In the last 2 weeks alone, a few records have already gone down the record books. This is heaven for opportunists.

In today's note, we wish to share our views and ongoing opinions on how we view the current market landscape and the strategies that we are and will likely be implementing to take advantage of the substantially different dynamics in today's environment.