Another week of volatility sustains.
It was a historic week for news flow as the ECB finally pressed the OMT button. Not a collective quantitative OMT action but performed via the NCBs (National Central Banks). If the devil is in the detail of these sort of policy announcements this was the certainly the detail.
In the short term the action its quantitative easing so does it matter on whose balance sheet the assets are held? In terms of asset prices near term, no. Main land Euro indexes made fresh historic highs. But in terms of risk management, yes as this is clearly a new chapter for the shared currency.
This policy statement reversed the central bank trend in the euro zone of the last 15yrs or so. The central bank functions are decentralizing than centralizing. This gives a greater voice to the NCBs and therefore undoubtedly adds risk. For example, controlling communication from 28 local NCBs is no easy task. The chances for conflicting communication and therefore ‘shocks’ to the market have greatly increased. Its yet another receipt for volatility, in my view. As the SNB showed no technical model can ever help you avoid news flow shocks to the market. Technical models by nature never capture the unexpected asymmetric shock. My point is the ECB announcement has likely hard wired shocks into the euro OMT model and risk models needs to consider that on the medium and longer term! The devilish detail of the announcement spoke of disunity not unity even though quantitatively its positive.
So, having not touched on the asset class for many years events are starting to direct us to gold again. I have been increasing allocation and I’m going to say a couple of paras on the asset class having been underweight during her 3 year plus cyclical bear market.
For wealth allocators the bullion trade is firmly back on the radar. Why? Wealth allocators have been struggling with this narrow market bull for some time. All but the best are busy scoring negative betas to the indexes they benchmark. When you add then, e.g. Central Bank unexpected news flow like the SNB’s last week or geopolitical actions like sanctions on Russia managing client’s wealth becomes an almost impossible task. This task will become harder if/as central bank inspired volatility increases. (Disunity see above). In summary, whether you manage US$ wealth or Euro wealth the low beta method to index global wealth is via bullion. Each dramatic event points to this and with each event more wealth managers turn to the yellow metal. Its becoming clear again that the yellow metal is reasserting her age old properties of acting as a store of value. In the last year “gold bugs” have not been the buyers but professional wealth managers are turning to the metal to protect their client’s assets. This internationalization and indexation of gold to wealth is a potentially a “structural” development which bodes very well for the yellow metal.
The next big test for gold will be when the US economy disappoints, likely in the coming months due to the strong US$. What assets will be sold and which will be bought when the cyclical US ‘recovery’ eventually evaporates? In my view, the question will likely be between two variables: A) will gold be the -beta to market moves and nominally fall but by less, for example, than say equity indexes? Or B) will gold be the alpha asset class and nominally rise vs all asset classes including US$ and Bonds? In either case, the secular gold bull market will likely be back.
In terms of cyclical models, that event would likely be a key indicator inflation was back on the agenda with significant implications for the broader commodity indexes! And a warning, rationalizing price moves of asset classes via traditional notions of supply and demand are not useful in our world awash with paper. It wasn’t a useful thing to do in the 1970s and it won’t be in the coming years. Price can and often does disengage entirely from micro economic theory due to monetary debasement. Money supply with money velocity can overcome any micro economic text book theory.
And finally before turning to the technical models, i take a moment to unpick these macro secular issues due to risk management in the main. Operating purely from technical models can blind you to asymmetric market risks. Without understanding how the macro is creating the technical price moves investors and traders alike expose themselves to immense risks. In our current paper world risks can be hedged cheaply in fact. Structurally the entire system is designed to encourage leverage/money supply increases. I suggest, we use these hedges for as long as they are available.
Reports here:
Lets start with the Swiss team’s latest:
Ill be updating this report through this morning as i realize this is a little late.. Keep checking this page..
Here a weekly MM technical view from Commerz:
Here CS with their multi market chart update:
Here CS with their prop analysis of the ECB OMT announcement:
And here CS wealth on the same issue of the ECB:
And here MS with their usual FX wkly:
Here JP with an update to their equity strat pos the ECB OMT event.
Here JP FX calling for parity eurusd
For what its worth, I agree that we are likely to see parity at some point in 2015 but i see the move as volatile spike down not a sustained move to parity as the dislocation to the global economy of such a devaluation would be immense if it is sustained. Germany’s trade surplus will be beyond embarrassingly immense. I hate to quote Cellente but he’s correct when he states: “currency wars lead to trade wars lead to world wars”.
Here JP on commodity fx:
Here GS with their wkly tech pack
For me the standouts here are eurostoxx600 and on the FX side the gbpusd. Both conviction 3 trades. Of the 2 the gbpusd trade is the more risky, in my view. CFTC shows that long US$ positions are extremely full at present. Its also correct that the short gbp trade is not full at all. The pair look nothing like the eurusd cftc positions so on this basis risk of a wider dollar disappointment but likely to be less volatile vs sterling than the euro.
Here an excellent report from JP post the ecb picking up exactly on the issues i mentioned live on hearing the news. Including negative consequences to the euro insurance industry as well as the trade war issues.The Greek withdrawals should be expected and sustain.
Here JP Macro data watch:
And here JP with their quarterly metals forecast update.
Note the 2016 forecast for gold, 1200$. (Clearly if the Dow is at 1000 and the SP500 100 this would be a good result. I suggest any nominal numbers nowadays need to be covered correlated to other assets so confused we have become by central bank interventions. Throughout millennia when currencies are debased this is usually an excellent period for alternative stores of value to be demanded. This is all I can re-say).
Here an excellent CS chart pack on the euro sectors. I like euro industrials especially following Siemens huge disappointment.
And here GS on euro equities post the ECB
Here RBC with a market overview piece, post ECB news.. Draghi’s war on Deflation.
All the best
Rich
p.s. here hot off the wires a CS FX update. Target 1.08 vs the eurusd.
This euro bounce have been weak so far. Fed in an hour or so could be important in reasserting the US$ bull, as could any news from Greece or Italy.