Liquidity

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.

Here's Why Dumping Risk & Buying Cash Might Be The Smartest Move This Year

Here's Why Dumping Risk & Buying Cash Might Be The Smartest Move This Year

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.

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: "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.