February 8th 2011
A distinct pattern amongst professional traders has emerged; long the UK equity markets, long commodities and short bonds. However, to sustain this particular play, traders need to sustain short term volatility and immediate down-side equity pressures following weak GDP numbers, and take a long term investment horizon.
It is easy to get wrapped up in the doom and gloom headlines which have become almost a permanent fixture on front pages of many newspapers. However, looking at long term value levels is a feature of the “pro trader” and, despite the risk of a double-dip, the resilient equity markets seem to be outperforming expectations of many analysts; the Eurozone crisis has done little to dent the joy of relatively impressive corporate growth and earnings. The FTSE 100 index, for example, is some 1000 points of its high of 10 years ago and, whilst I appreciate we can’t trade on such long time spans, it is hard to make a case that – on a technical level – the large cap stocks on the UK index are overvalued. Indeed, many of the blue chip stocks in Europe are still delivering healthy dividends. With interest rates staying low, there are few alternatives for decent yields (assuming you don’t want to be involved in the sovereign debt market). In short, the view of our professional trader client base is that whilst the momentum is on the upside, it’s often best to go with it.
Shorting government bonds have been a favourite play for many of the longer term pros over the last few months, but as with any long term play, deep pockets are sometimes required. Gilts for example have traded from over 124 down to 118 in just a couple of months. Expectations of higher inflation and interest rates were the reason for shorts and it seems inevitable, with all the quantitative easing that has been going on, that inflation will continue to increase. However, as has been widely remarked upon by commentators, raising interest rates may not be the solution due to the concomitant risk of a debt ridden “consumer lead double dip recession”; CLDDR, pronounced ‘colder’, may be the next acronym to dominate the financial pages later in 2011 following PIIGS, CoCos, CIVETS etc) Obviously here I am talking specifically about the UK consumer and I think that the tone for this year will be selective investment as clearly some economic divergence is inevitable, not just in Europe but globally. So, our long term bond speculators remain short, determined to sit on their positions resisting temptation to take profits too early.
Outside of the core equity/bond plays, precious metals are still a favourite amongst the professional market participants. Gold, although well off the highs at 1350, seems to have seen renewed buying activity over the last couple of weeks amongst our client base, with many expecting to see new highs again in this first quarter of 2011.
Currencies are emerging as the asset class of choice for professional traders. Not surprising given that it trades 24 hours a day, with extremely tight spreads and high leverage. The EUR/USD is still the main pair with professionals looking for 1-2 cent moves, which can sometimes materialise with a trading day. As trading opportunities are abundant in the short term, there are few long term directional traders but the fundamental consensus is that the Euro may see investment from the Far East as concerns that the Chinese economic bubble may be close to bursting.
ProSpreads clients, comprising only professional traders, seem to have been getting the majority of their calls right over the last 6 months with short bond positions, long equity and long commodity positions; there is no clear indication that they are about to change their views.