Less Risks, More Profits? Love Stress! (Oct 2015)
Nervy Third Quarter
The last quarter (June – Sep 2015) was a tragic tale with many acts. Some US$11 trillion was wiped out as stock markets were brutalized across Asia, Europe and US. Commodities accentuated their downward spirals, and funds continued their flight from emerging promised lands, (nearly US$1 trillion drained away over 13 months till July, much of it from China). For many days, depressive equities regulated the pulse of different markets, and there was even a brief period when desperate hands enthroned Euro as a pseudo safe haven currency. In Asia, we watched how the credit sound Singapore dollar was trampled when naysayers connected dots between China and Malaysia as Singapore’s top two trade partners. Later we witnessed the mighty US dollar being resuscitated in its invincibility. We saw how hopes recovered when China injected stimulus funds into the stock markets, and growing relief that a low Fed rate regime would likely pervade in the immediate future. Even when most equities started languishing in ranges, plummeting oil price drew an unwavering trend line as supply continued to flood the market despite expected decrease in seasonal refinery demand. Then of course, Glencore and Volkswagen provided the final act for the curtain call to end the quarter. Indeed through the many rampages, experts and soothsayers from economists, politicians, analysts, to business leaders and traders were finally singing the same chorus – we were in total crap.
Stress Creates Advantageous Opportunities
So what did the astute, mercurial trader do? He embraced stress. In one of the most noteworthy third quarters, the world was launched in a clear trajectory on many fronts, and the stress driven events which evolved created many risk efficient, profitable trading opportunities.
An example was when China devalued the yuan on Aug 11, and stunned markets all around. The ensuing mania spurred a massive exodus from Asian currencies to the relative safety of European dominions. As events unfolded over the next few days, the Euro’s fairy tale “stability” (in recognition of ECB’s consistency) propelled the Euro upwards. During that week, nimble traders longed the Euro and Sterling but shorted China related currencies such as the Singapore Dollar, and the equity markets, particularly the unfortunate Hang Seng Index. Following that short episode, markets were still vexed by uncertainties, and the probability of a US rate hike diminished markedly. Given that environment, the Euro naturally climbed as risk averse investors continue to unwind the Euro carry and reduced short Euro hedges. Again it seemed so natural to long the Euro during that anxious period of low rate expectations and un-acquitted challenges.
What we saw was stress from significant events drove different markets in apparent pathways. Market players who were previously pursuing different agendas became united in one purpose as they bolted for the same exits with largely the same intent. These created clear sustained momentum in obvious directions. For a trader, this was a godsend – direction bias and strength permitted smaller stops and faster profit goals. Less risks, more profits. Hence anxiety over existing portfolios need not eclipse the lucrative opportunities stressed markets present, instead the trader should take prompt actions to exploit them.
More recently, the September quarterly close was itself a prominent event. September was the month liquidity was to return en massed after the summer siesta. In a way, it was convenient that Glencore and Volkswagen drove the US and European markets southwards. The downward trepidation in the last weeks was a necessary prelude to the spike up heralding September’s window dressing close. For this year at least, the markets rewarded such an attentive trader.
Next Quarter – Dining On A Buffet Of Opportunities
So what happens next? After the dust has settled, investors and traders will question what has really changed. Will volatility decrease? Has economic progress turned backwards? Do we have an inverted yield curve? Have the confusions that punctuated last quarter drawn any meaningful road map for the next? Are central banks any clearer than they were? Rather than be stressed over contentious answers – perhaps it is more rewarding to focus on what is going to be served in the most tantalizing quarter of the year.
The final quarter is usually the last opportunity for businesses to energize their earnings for the financial year. It is buffered with high liquidity, and potentially profitable opportunities such as October book closure for a large number of mutual funds, the earnings reporting season, change in seasonal demand for commodities such as oil, quadruple witching expiration, year-end window dressing and pressing deadlines for key decisions like the elusive Fed rate hike.
Not on the calendar are unexpected events that will again throw momentum in biased aims. Startling economic health revelations, and unanticipated statements by leading figures can provoke searing market responses. Speculation is rife that Japan and ECB may introduce more easing measures this quarter, whilst strategic maneuvers in the Middle East may whip up oil prices. In fact any high tension political drama can sound risk off alarms world-wide.
Of course, we also sleep under an ever descending ceiling of daggers – with receding liquidity in the bond market as financial institutions reduced fixed income inventories, and with much irony, living in the most debt burdened world since time immemorial. Combined public and private debt is now 265 percent of GDP in developed countries (a jump of 36 percent since 2007), and 167 percent of GDP for emerging economies (China alone owes 235 percent of GDP). Offshore US denominated debt has reached $9.6 trillion, and approximately 80 percent of the dollar debt in China are of short term nature. Can you imagine what will happen if the Fed really raises the rate this quarter?
The last quarter promises action galore and stress driven opportunities. A clear mind and a well-organized roadmap of information will help the nimble trader find trades with the best risk reward advantage. Will you be stressed or be ready for desserts? (OK a bit corny but I can’t think of anything better for now.)