With the Greek ” (no) fix” investors will start focusing on the true elephants of Europe, with Spain in pole position for the moment. Market reflections by Peter Tchir.
The “Nothing is Fixed” rally continues to annoy most people. Just like last week, the refrains that nothing is fixed and nothing can be done are ringing out loud and clear, and once again markets have faded from overnight highs.
While the “Nothing is Fixed” rally is only possible because of government intervention and the fact that the “Everything is Broken” sell-off took the markets too low.
Much of the bad news that caused the “Everything is Broken” sell-off that took S&P from 1,402 on May 1st to 1,278 on June 1st have started to be addressed. The economic data globally continues to be weak. That is dangerous. A near term Greek Exit looks less likely, the problems at JPM seems isolated, contained, and largely over.
The “right” price for the market remains elusive and volatility will continue until the markets determine the extent of government and central bank intervention. A few good things have happened, and in general the tone has indicated a willingness to do more. Without more programs and details on existing programs, the markets will fade, but for at least a few days, a steep sell-off is unlikely until the policy makers provide a strong sense of their ability to do anything more.
If EU policy makers have learned the lessons of Sisyphus and the Fed decides to act rather than trying to catch a falling knife then look for another strong end to the week. In the meantime be concerned about the weakness, but don’t overreact as it seems that “fading the rally” and saying “nothing is fixed” has replaced much of the cheerleading the market is usually exposed to.
What to do about Spanish Bond Yields
With news dominated by the Greek elections, the imploding Spanish economy and more, people tend to forget about other issues. One of those being the currency wars going on. Some thoughts on the subject, via Voxeu.
In the mid-1990s, many of the large developed countries ended their activist approach to foreign-exchange-market intervention. Yet while these operations faded, they never disappeared. The Great Recession recently piqued interest in them, as exchange-rate volatility increased and threats of currency wars were heard (see Neely 2011). Still, then, the key question remains: Do sterilised interventions allow countries a way around the fundamental trilemma of international finance by providing them with a means of systematically affecting exchange rates independent of their monetary policies? Japan, Switzerland, and China provide some lessons on that score. In recent research (Bordo et al. 2012a), we demonstrate that despite differences across these three countries in their degree of exchange-rate flexibility and their extent of sterilisation the fundamental trilemma holds.
The fundamental trilemma of international finance maintains that a country cannot simultaneously peg an exchange rate, maintain an independent monetary policy, and permit free cross-border financial flows (Feenstra and Taylor 2008). At best, only two of the three are feasible.
Guest post by Vix and more.
An emerging area of interest in the markets in general and in this space in particular is the subject of how to blend volatility exposure – both long and short – into a portfolio.
Clearly the role of volatility in a portfolio is a subject that warrants further analysis and discussion.
It is worth noting that issuers of exchange-traded products have taken several approaches to addressing volatility. The most obvious was the launch ofVIX-based ETPs, such as the popular VXX (iPath S&P 500 VIX Short-Term Futures ETN,) which is a long basket of short-term VIX futures.
Subsequent products have tackled the subject of volatility in a variety of different ways, including:
- Utilize low beta stocks to minimize portfolio volatility (SPLV)
- Employ a market timing mechanism that dynamically allocates between stocks and bonds according to measures of market volatility (VSPY)
- Employ a market timing mechanism that dynamically allocates between stocks and VIX futures according to measures of market volatility (VQT)
- Employ a market timing mechanism that dynamically allocates between long and short volatility positions (XVZ)
Greece’s centre-right New Democracy party scrapped its way to victory over Syriza, its radical leftist opponents, on Sunday in an election pivotal to the efforts of European leaders to hold the eurozone together. According to interior ministry projections, with 97 per cent of votes counted, New Democracy was set to take 29.7 per cent of the vote and 129 seats in the 300-member parliament, compared with 26.9 per cent and 71 seats for Syriza. http://www.ft.com/intl/cms/s/0/333c9448-b845-11e1-a2d6-00144feabdc0.html#axzz1y7J4LjIF
The global recovery has stalled again as confidence in policy makers’ ability to provide conditions for growth has slipped away, according to the latest FT/Brookings Institution Tiger index of world economic conditions. Professor Eswar Prasad of Brookings said: “The global economic recovery is being held hostage by political brinksmanship that has created policy paralysis, undermined confidence and stymied the effectiveness of macroeconomic policy tools”. http://www.ft.com/intl/cms/s/0/fb7b2ab8-b882-11e1-a2d6-00144feabdc0.html#axzz1y7J5y2wM
The head of Denmark’s central bank has warned that the Danish krone is coming under intense pressure from investors seeking a haven in Europe and betting that the currency’s peg to the euro could be cracked by the crisis. Nils Bernstein, the governor of the Danish central bank, said that the upward pressure on the krone was the most severe he had seen in his seven years as governor, and warned that negative interest rates could be on the cards if the problem continues. http://www.ft.com/intl/cms/s/0/06836ec2-b6c9-11e1-8c96-00144feabdc0.html#axzz1y7J5y2wM
The Bank of England committee charged with ensuring the stability of Britain’s banks is split over George Osborne’s plan to oblige it to support the government’s new growth agenda. In a little-noticed section of his Mansion House speech last Thursday, the chancellor said the BoE’s Financial Policy Committee should no longer focus narrowly on safeguarding the banking sector. The FPC should not be creating “the stability of a graveyard”, he said, and in future would have a “secondary objective to support the economic policy of the government”. http://www.ft.com/intl/cms/s/0/2196b248-b884-11e1-82c8-00144feabdc0.html#axzz1y7J5y2wM