By Dean Popplewell
After a three-week and $3t financial market sell-off, measures of risk show the global investor are assuming a return to stability, and with it a level of confidence that some believe could “be horribly misplaced.” Asset classes from commodities to equities are moving in tandem to a degree not seen in nearly two-years, while risk aversion currencies such as yen and defensive stocks like utilities, which have usually joined the rout, seem absent this time. Market measures of volatility remain low. This combination of low volatility and coordinated moves among risky assets could be deemed rather threatening or inauspicious. The collapse that has spread fear across all asset classes and in all regions on the premise that the EUR will eventually break up, may have more room to run. Is the market miss-pricing risk? Should the temporary market relief be seen as an opportunity to add or rebuild strategic market shorts?
Unlike in previous sell offs, no asset class seems to have been spared. Volatility has meanwhile been suppressed, both by the cheapness of the VIX and by the abundance of cheap cash being pumped into the markets by various central banks that has led to a global hunt for yields. Euro peripheral bonds seemed to have tightened on the curve in a general "risk-on" move, mostly on the back of little volume and substance behind it. The short covering makes sense ahead of tomorrows extraordinary European Council meeting, where in principle, Germany potentially easing up on austerity enforcement and simultaneously allowing more "proactive growth measures" potentially is good.
Is the EUR in danger of going into lock-down mode ahead of next months Greek elections? If Friday or yesterday’s tepid session is anything to go by, the answer is in danger of being in the affirmative. Before the first Greek election at the beginning of this month, the year-to-data trading range was stuck in a five-cent range. The next five-cent range could occupy between 1.25 and 1.30. Obviously not helping the range will be the ECB not meeting until June 6, the Fed’s next monetary settings takes place at the end of June and the PBoC recently easing policy, implies a few weeks of “lull in policy circles.” As some analysts put it, the market may seize while it waits for policy and political outcomes to kick in and filter throughout the system.
Retail market position is relatively even, split either side of +50%. Technically, there is still nothing in the current environment to suggest that demand for safety and liquidity has diminished. A market that is gyrating between risk “on” and “off” is simply reflecting the impact of fast money. Fundamentally, the time to say that risk is really on is when we get a sharp correction on safe haven bonds yields or bunds or gilts or Treasuries. The 10 DMA for the EUR at 1.2813 was marginally broken last night and until spot sustains a break above this level participants would prefer to sell short another fail around this print.