All posts in category: Market dislocation (6)

Three Things That Didn’t Happen

Friday, March 24th, 2023

No dollar surge, no switch to defensives or into EM Equities

We have written before about the importance of dogs which don’t bark in the night. Three things did not happen last week. The dollar did not surge in response to stress in financial markets. Equity investors did not dump cyclical or high-beta sectors in favour of defensive sectors. There was no shift towards EM Equities in response to a banking crisis in developed markets. Simple explanations are often wrong, but maybe investors think that the dollar is structurally over-valued, that there isn’t going to be a recession in the US or Europe and that the great globalisation trade of the last 30 years is over. They could be wrong, but their opinions are important.

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Currency, Currency, Currency

Friday, September 2nd, 2022

Euro and sterling FX markets could become disorderly.

Nobody likes to consider the prospect of a currency crisis, but we think this is getting more likely by the day. We have long thought that the hiking cycle in the US would cause at least one major asset class to come unstuck.  When we wrote the original note, we didn’t think it would be European currencies, but this is what the price action now suggests. Both sterling and euro have broken down out of previous trading ranges and both could test historic lows if the FX markets become prisoners of their own momentum, as sometimes happens. European investors need to own as many natural hedges as they can – US issuers in credit and dollar earners in equities.

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Something Is Going to Break

Friday, May 13th, 2022

Volatility has entered the danger zone.

Realised volatility continues to march higher every week and we have now got to the danger zone, where this creates the conditions for more volatility – especially if the FOMC is committed to much tighter monetary policy. In these circumstances, traditional valuation metrics lose a lot of their power and investors should assume that markets in one or more major asset classes will become disorderly. We think this has already begun in Nasdaq, Italian government bonds and the Chinese yuan. Other assets, which may follow in due course, include US High Yield, credit ETF’s and US housing.

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Simple Explanation

Thursday, November 15th, 2018

Industrials are weak in both equity and credit models

Weakness in US Industrials can often be a signal that we are close to a period of market disruption. That signal is flashing yellow, as are the signals from other equity regions such as the UK, the Eurozone and Japan. We have red flags on Industrials across all of our credit models. We don’t have a clear and obvious cause yet, but the simplest explanation could be that we are closer to a significant slowdown than consensus thinks.

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Enjoy Your Long Weekend

Wednesday, March 28th, 2018

US buy-backs to the rescue

Risk conditions have deteriorated faster than we expected and the deterioration has been led by the US, which is unusual. The excess volatility of US Equities relative to Treasuries has experienced the sharpest three-month increase in the last 22 years, including the run-up to the GFC. The current correction could well be as bad as early 2016. To end it, we may need the Fed to take a time-out on the June rate-hike. We will certainly need US corporates to resume their buy-back programmes as soon as the earnings timetable allows. Apart from Emerging Markets, buying the dip in international equities, without doing the same in the US, is not an attractive strategy.

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The Missing Piece of Chewing Gum

Wednesday, April 26th, 2017

No clear signals out of China

We don’t have the killer chart that says China is going to blow up or shoot the lights out. Our models are curiously inconclusive, which is unusual for China, and the underlying data are trading in a very narrow range. All of which makes us nervous.

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