“The darkest places in hell are reserved for those who maintain their neutrality in times of moral crisis” – Dante Alighieri
I happen to think that AUDJPY and EURJPY are key leading indicators…Overnight EURJPY broke lower, of course mainly on EUR, but interestingly I’m starting to see research which calls for JPY strength to “help” the Japanese economy through increased “buying power”. (Ref. GaveKal)
But, what does the EURJPY downwards break mean except that the euro is finally tanking for real? It’s certainly the case that JGB yields are rising:
I guess we’ll have to wait for AUDJPY – the ultimate “risk on/risk off”indicator – to give us the answer. AUDJPY is off from high of 102.50 in November – a risk on high… to 92.46 now with a 88.22 break a clear sign that we must be risk alert.
I believe the JPY cross is a harbinger for what could be a very tough April. The market is coming to terms with a June interest rate hike in the US – but one that is not driven by economics. This hike will be entirely driven by a “margin call” on bank and asset inflation not by economics.
I visited London early this week and one of the smartest “real value” investors I know (beating Berkshire over ten years) runs a “filter process” on 10.000+ stocks. His selection of “cheap stocks” is now down to …..25 stocks! The norm is 300-600. Of course, this does not mean stocks are expensive or ready to roll over, but it means every single stock in the world is trading at or above “fair value”. The expected return for three and five years remains zero, with 10 years showing up at 2% !
Another good indicator is JPM’s CDS – every time it breaks its 50-day moving average it seems the market is going into risk-off mode.
The global stock market is also breaking its 50-day moving average – so while the DAX and Stoxx50 are on fire, markets overall and globally are falling!
Just to illustrate the “momentum of DAX” – here it is vs. its mean reversion:
Economically – as I had expected – Eurozone data is now slowing down. Europe is an export machine and when rest of world is slowing down Europe will get hit. So while the European Central Bank’s Mario Draghi is busy declaring victory for quantitative easing and the coming inflation, the markets are again making sure he will look out of touch – as out of touch as he was in Q1-2014 saying deflation would not happen in Europe.
The danger signs are there for all to see: Commodities are lower and the strong US dollar will have a big impact on emerging markets and the US economy. And while the euro may be weaker vs. the US dollar, it’s actually stronger vs. many big growth nations in emerging markets.
To prove the point the 5Y5Y US is now falling again, indicating fewer people believe in inflation in the US and hence in the global economy through the US dollar link. Draghi, and the Greek government too seem to think they live in a separate universe where different rules applies.
Main macro views:
• US: Fed will hike in June on margin call on asset inflation. Nothing to do with economics. US growth QoQ will hit close or below zero by Q3 or Q4 – keeping yields low. Still see sub 1.5% and even 1.25% this year in 10-year US fixed income.
• Europe: The big start to the year will fade as there are no “export markets” growing into Q3 and Q4. Expect a sharp slowdown over the summer and Bunds below zero.
• EM: Biggest value, but call on the US dollar debt is expensive right now – the net impact from a weaker currency not felt due to this heavy US funding reliance. South Africa, Turkey and Brazil remains my biggest shorts.
• Commodities: Despite my alpha model selling gold, I remain constructive in net allocation (Beta allocation to commodities increasing) and forward-looking. Buying out-of-money gold calls is a must.
• Overall: 2015 is a lost year for world growth and reforms as the two growth engines of the world – the US and EM – are both slowing down. Europe is in no position to add anything to global growth as we are entirely dependent on foreign demand through exports due to lack of reform domestically. 2015 is a transition year on growth which will bottom in Q3/Q4 and 2016 increasingly looks like a very challenging year for markets as the momentum of QE in Europe and Japan runs out.
Positions:
Beta: Same… 75% in FI – mainly US 10-year.
Alpha:
• Max (4 units) short EUR now – stop 1.1150
• Max (4 units) short EURSEK – stop 9.3068
• Long 2 units USDJPY – stop 119,68
• Short 2 unit Wheat – 512.00
• Short 2 unit XAU – stop 1194.00
Conclusion:
It’s time to exercise preservation of capital – April could become a very tough month in terms of both volatility and risk. There are too many moving parts in this big puzzle called the markets.
