2013 destined to deliver some certainty

2013 gets off to, should I say, an interesting start. Volatility reared its head as the US avoided (for the time being) the fiscal ‘cliff’ which the markets had been waiting on the last few weeks: albeit congress still could not agree, and the US senate saving the day. The relief of some resolution, even if temporary, provided a lift to the equity markets, which have eased off slightly since.
So the theme of 2012 seems to be the theme to start this year too, with indecision by investors and traders on the direction of the global economy and outcome of the Eurozone crisis, leaving speculation on the sidelines. However, I don’t see this inactivity lasting for much longer…
Why? Well a few reasons… Firstly, the FTSE 100 is at a pivotal level around 6100. The last 3 years have seen this UK index range between 5000 & 6000 bar the odd blip respectively below and above these levels. In fact the FTSE traded above 6000 on 5 consecutive months in the first half of 2011 but failed to maintain the ‘6’ big figure in the second half, with the market retracing back to below 5000 in the autumn of that same year. 2012 saw a couple of attempts to break back above 6000, once at the beginning of the year and once at the end of the year, with a correction down towards 5000 in-between. So clearly we are at a critical level for the technical analysts amongst us. A break above 6100 could see the market head towards the all time high of 6950, last seen at the turn of the century! Failure to maintain these levels could see the market retrace again towards 5500 and then maybe lower again. Secondly, I have traded through a few market cycles in my time, and this is definitely the longest period of low volatility I have seen; if you believe that frequency is inversely proportional to magnitude, then we may be in for surprise in the coming months, as the market’s coiled spring unravels to deliver significant direction. Also, in my experience of trading the financial markets, when the big trading banks have been aggressively reducing their staffing levels, it has been near the bottom of the cycle, with brighter times ahead.
Without trying to place too much of a positive spin on the trading prospects for this year, we don’t have a huge amount of scheduled news for this year which could itself help move the markets, as any unexpected news release could be the driver for a directional move. Last year’s plethora of important elections, Eurozone crisis and QEs, resulted in many investors sitting on the sidelines waiting for the next scheduled announcement or election result; so hopefully this relative clean sheet will help provide some certainty as where we are headed in the coming months.

Volatility plummets……

…..as investors go into Olympics mode

Markets have been bombarded by conflicting data from all parts of the globe and it comes as little surprise that many investors are so uncertain of what the future holds that they couldn’t have asked for better timing to see the greatest sporting event on earth finally arrive to London. Recent trading ranges have been so diabolically narrow and volumes so thin that volatility has dropped through the floor and things are unlikely to pick up again until after the summer months and we’re into the Autumn.

The contrasting data has left investors confused following an EU summit that at least seems to have tempered nerves to some degree. The ratification process needs to be completed and further integration is inevitable in order for the measures to succeed but whether the politicians and their voters will allow it is another matter. The longer things go on however, the more the time bomb ticks and expectations are still that a “Grexit” is on the cards at some point in the near future.

At the same time doubts remain over the sustainability of the Chinese economy. This week we’ve seen lower inflation data and terrible imports numbers in a prelude to GDP figures due in a few days time. The question over soft or hard landing for the world’s second largest economy is still very much in debate and anything too much below the 8% mark could easily send markets back into a bit of a tail spin.

But whilst the issues in the eurozone continue to rumble on and China’s economy looks a little shaky there have been a couple of anomalies that have kept the bulls interested. UK industrial and manufacturing data for May was much higher than expected, almost un-recessionary it was so good and at the same time Italy released much better data. Unfortunately though this is likely to be nothing more than a flash in the pan as the May bank holiday was in June, plus it was an extended one for the Jubilee, so we can expect June’s number to bring us back down to earth with a bang.

For now though it’s all eyes on the Olympics – take your pick out of the hundreds of events to follow – I am a table tennis man myself and judging by the way the markets have been moving recently it is likely to be a great deal more fun to watch than the FTSE!

Is it riskier being out of the markets..?

Three months into 2012 and, apart from the snippets of Siberian weather, this has not materialised into the winter of discontent that many feared.. (markets wise I mean)

I know it’s not unusual to a have new year rally in equity markets, but with the grim reaper AKA ‘Eurozone Crisis’ standing in the doorway it would have been easy to assume that any new year rally would be short-lived..

However, as we near the end of the first quarter, the FTSE 100 has climbed an impressive 400 points. No doubt many investors will have seen this is an opportunity to take profits on their holdings or even short the market, but now that investors are out of the market there could be continuation of this rally. I actually spoke with a broker on the train this morning, and he said that some shrewd investors felt it was a greater risk not being in the market.

In January I touched on why the stock markets could see gains this year, (i.e. where else can you get a yield that many blue chip companies still deliver and the potential default of some of the weaker Eurozone countries being already priced in the market,) and my commentary has not changed, with still no obvious reason why equities could not go higher. But I would like to add a condition here; if or when Europe sees an actual default the markets will no doubt shudder a little, but are likely to only pave the way for further gains.. One step back, two steps forward springs to mind.

The problem is I fear many investors are gearing up positions for that short, maybe sharp, fall in stock prices, however the opportunity to take profits or go long again might be short-lived and lost in the blink of an eye.

It’s the same with the Euro currency itself, which should initially weaken on a default but find strength again as the relative superpowers in Northern Europe rebuild on more solid foundations creating a very strong prosperous ‘New Eurozone’…

Right now I don’t think many traders or investors expect the stock markets to roar, but the true contrarian inside me says otherwise..

Interest rates, certainly UK ones, have been stuck at 0.5% for years…and it’s extremely difficult to intelligently guess when things are going to move again. If we see an increase (or decrease !) people will feel there is assertive direction to economic growth which makes investment choices easier to make, although that does not ensure profits are easier to make !

Whatever materialises, 2012 feels like a different year to 2011. The problems and issues are the same, it’s just we have moved on..

2011 – ‘the year that time forgot ?’

To expect history to forget the economic and sovereign turmoil that embraced 2011, seems a difficult ask; however 2012 brings new challenges and areas of focus, to the extent that the Eurozone crisis may become a sideshow to other major events on the 2012 horizon.

2011 was a difficult year for the majority of stock market players, with contrasting performance across the globe. What seems to have passed us by is the relative success of the larger US companies, with the Dow Jones index finishes an amazing 6% higher on the year; compared to the UK’s FTSE 100 index falling 5.5 % and Italy’s FTSE MIB Index experiencing a painful 25.7% decline. During this downward journey for the European Stock Markets in particular, the price movements were violent, which resulted in even the most savvy of investors or day traders, licking their wounds. Certainly in the 25 years I have been trading I have never seem such a relentless pattern of markets looking so weak at one moment in time and then turning on a sixpence a second later to look like the best thing since sliced bread. These conditions favour few investment or trading strategies. Even if you lean towards range trading, you may have to see your position go significantly against you before a chance of profiting.
This extreme volatility has resulted in many institutional market-makers sitting on their hands, which in turn reduces the liquidity, which in turn increases volatility further.. and so on. The question on everybody’s mind right now is what will 2012 bring for the financial markets, global economies and the Eurozone.

Coming back to my point of the Eurozone crisis story being sidelined by other events in 2012; I almost feel that it will not make much difference, in the the long run, if some European countries break
rank and go on their own. This is not to say that instability and uncertainty won’t feature in the short term for countries who pull out (or get booted out) of Europe; however fiscal independence did work for the majority of these nations…for hundreds of years previous to adopting a single European currency. So a possible scenario is that the weaker, debt ridden Mediterranean countries may well leave the Eurozone one by one throughout 2012, but will gain strength from their independence eventually and thrive again. This would leave a stronger northern European Eurozone; possibly just consisting of the Benelux counties, Germany, and France; thus tempting the likes of the Scandinavian counties to join and even Britain ! Either way, the end result is not necessarily a bad one, giving an element of credence to those who look to profit from long term investments in European equity markets.

So what could divert our focus for the next 12 months ? Well where should i begin… continuing turmoil in the Arab states, a US presidential race with a potential for change of leadership in the four most powerful counties in the world; America, France, Russia and China… Then there’s the global economic outlook to consider; not just whether we are double dipping, but just how big the second dip will be..
Depending on the direction the economic outlook takes, this will no doubt directly impact interest rates. If the economy is rebounding (upwards) then this gives the green light for an increase in rates, taming any resurgence of inflation, but threatening the debt ridden consumer, who to date had ridden the recession with the bonus of lower mortgage payments.
Either scenario for the economic growth may well override the focus on Eurozone woes (although partly connected), coupled with threats of unrest in the middle east and uncertainty in South-East Asia.
With stock markets looking attractive for their rate of return, given the low interest rates available from the banks, there may well be opportunities to profit in 2012; but be warned, the unexpected often lies beneath, so prudence may be necessary to prevail the coming months..

Europe: double or quits…

Europe, it appears, is reaching its denouement. Whilst the new Governments of Greece and Italy will bring some reassurance, my belief is that the damage is done and we will see a double dip recession. Without wishing to be a doom and gloom merchant, it is remarkable that so many had assumed everything was going to be ok, even when we knew over a year ago how bad everything was with Greece, Ireland, Portugal, Italy and Spain…

Many supposed that Europe was simply too big to fall, and to a certain extent, they were right. However, that was always underpinned by the assumption that the larger northern European nations, namely France and Germany, teamed with the IMF, would just keep bailing out the weaker nations. This is all very well, until those nations or global monetary funds fall into difficulty themselves, thus turning to their own fiscal woes…after all, charity begins at home.

With Italy soon to be under new leadership, it may allow some breathing space to its current debt woes, but the problem has just not gone away. Things are not much better closer to home either. It was only two months ago when the Bank of England thought 2012 would yield 2.1% in economic growth, yet a few weeks later many forecasters are set nearer 1%; forcing the Bank to revisit its own forecasts this week.

Our professional client base is seeking to profit from the Eurozone fallout, mainly via the FX markets. The continuing weakness of the euro has finally brought some attention to the pound, which has until now been just an understudy to the US dollar. Although the UK is on the fringe of continental Europe and therefore directly affected as a result, it is surprising that the pound has not shown relative strength against the euro. The GBP/EUR pair has been predominantly trading in the 1.10 to 1.20 range for the last year, with momentary blips beyond. Recently, however, it has attracted interest from professional traders who have built long Sterling, short Euro positions, driving the GBP/EUR pair up to 1.17. This momentum may test the 1.20 level, a breach of which will have commentators talking 1.30 as the next stop. It is tempting to assume that interest in our currency is a good thing, but the impact of this is that exports become less attractive. This double edged sword is fine when economies are booming, but not so when it’s hard to make ends meet.

Although the bond markets are a tempting play for professional traders, their interest is normally reserved for changes in the interest rate cycle; however a change in the cycle, i.e. interest rates rising again, now seems a way off with ‘double dip’ taking centre stage again; so unless you are trading sovereign debt, which is definitely not a product for the risk averse investor, then primary focus remains on the currency markets.

Within our clients base trading outside the FX market, the consensus is that equity markets should be lower, but patience is required. As quiet markets tend to drift higher our professional clients tend to place stop loss limits a healthy distance away.

Gold has lost its shine, as far as interest amongst the professional traders is concerned, as the volatility has faded following the assumption that inflation may well be topping out.

In the midst of this turbulent economic storm we are at least granted one ray of sunshine. Eventually the Eurozone crisis will reach its peak, whether by organic default or never-ending intervention, at which point the global economy will build on it’s more solid but transparent foundations leading to a long period of growth and prosperity… not a matter of if, but just a matter of when…

Volatile Volatility

As the summer draws to a close traders will be trying to reflect on what has been dramatic two months of market activity. Autumn is traditionally the most volatile time for the markets, with trade higher than in the slow summer months, so it could prove to be a serious roller coaster ride for all traders.

The period running up to August was both calm and predictable. The markets found a comfortable range within which to trade and since April the FTSE stood at a constant 200-300 point range. Many, including myself, expected a quiet summer – albeit with a small print disclaimer, ‘Assuming no crisis rears its head’.

It turns out it was fortunate that disclaimer was in place. At the beginning of August a crisis hit when the United States lost their AAA credit rating for the first time in their history. This served as confirmation that the sovereign debt crisis was not just confined to the weakest members of the Eurozone, but also to the mighty US.

This was the catalyst for a sharp revaluing of the global equity markets, with most developed world indices corrected by over 10%. The following six weeks offered little respite, with the daily ranges enough to catch out even the most sophisticated traders. As we know professional traders thrive on volatility and the movement of the volatility index, the VIX, which shifted from 15 in July to 47 in mid-August, would suggest a bumper crop for the astute speculator. However this was far from the case.

When markets plummet and continue to feel weak, professional traders normally short the market, looking for a continuation of the move. However it was soon apparent that one minute the equity markets would look extremely weak and the next minute, and I mean ‘minute’, the markets would reverse and return a great deal stronger. These choppy conditions are not favoured by the professional traders and many struggled to capitalise on what would normally be an early Christmas present of volatility. These conditions were certainly not helped by the relative illiquidity of the summer markets, but they were accentuated by the underlying sense of uncertainty of what lay ahead.

However, commodity bulls were able to make the most of this unease with the price or Gold jumping to just shy of $1950/oz and many analysts suggested it could fly higher still to $2500/oz. These severe daily ranges that rocked the equity markets have subsided slightly, and this has seen gold priced down to $1600/ounce. The slight reduction in volatility is no bad thing for both the pro traders and the retail investors, who may decide that now is the time to re-enter the market, albeit in a more controlled fashion.

Nobody likes the Euro, especially the professional traders. While eyes had been firmly focused on the equity and commodity markets for most of the summer, the EUR/USD spot contract had been relatively neglected with limited activity, confined to a 1.40-1.47 range since May; however in September the 1.40 level was breached and the market has not looked back since, with lows of 1.3350 within a couple of weeks of the break. Any rally in this contract seems to be viewed an opportunity to short again. Work on the street is that 1.38 is a major resistance level and pro traders are likely to generate short positions there, although it appears that the shorting on the current up move has already begun…

With a Greek default seemingly imminent, the most volatile markets may yet materialise, generating opportunities where the risk rewards may be unpalatable to most traders, professionals and retail investors alike.

Summer markets arrive..

Summer markets are normally quiet, with liquidity waning while traders jet off to sunnier climates. However,
illiquidity combined with economic and social unrest can sometimes form a toxic concoction, leading to volatility
and trading opportunities for those who stay at home over the summer.
Equities are ranging aggressively as the dynamics of wanting to trade higher are dampened by a permanent
ticker tape of Eurozone crisis. Italy is fast becoming a greater concern than the traditional PIGS, most of which
have been bailed out by their Eurozone neighbours. This is perhaps aggravated by “the bigger they are the harder
they fall’ theory. However, Italy does have some key economic comparative strengths that are often ignored.
Italy’s deficit is the one of the lowest in Europe, and is a nation of savers with consumer debt around half that of
Spain. Additionally its personal mortgages are generally long-term, meaning consumers are less exposed to short
term increases in interest-rates. In other words, Europe is more exposed to Spain that Italy, in that the latter has
some key fundamental support on its side.
When there is little sight of good news even the professional end of the market can find these choppy conditions
difficult to trade. These “pros” will normally like to trade from the short side, but seem to be buying up equities on
the dips to take profits a few days later. This swing trading strategy is normally not their core approach as they
like to jump on moves, in the belief that the move will continue in the same direction.
As concerns over Italy materialise in what is a summer market, moves are probably going to be extreme but are
likely to create opportunities for those who are brave and have deep enough pockets to see the market move
against them before rebounding again.
In summary, the astute professional traders are buying into the weak equities market, with a weighting towards
Italian stocks. They are often favouring “pair” trades whereby they buy and sell the same asset class on the
expectation that one equity will outperform another. This hedges the trader should the market as a whole
collapse, while creating opportunity for profit if their selection is correct. Not a bad strategy in such choppy