Trading Over Your Shoulder : No View Is A Good View

I like Citi’s piece, Resist Indiscriminate EM Positioning.

Put simplistically, the FOMC’s concern about tighter financial conditions refers to the increase in long-term interest rates.
The pressure faced by emerging markets in recent weeks will likely subside, although investors are now unlikely to be as indiscriminate as in the past.
Within EM FX, we prefer positioning for currency appreciation where key vulnerabilities are being addressed and where official intervention is likely to be limited.

Goldman says something along the same lines about the uncertainty.

“Discretion is the better part of guidance
….more discretionary forward guidance. The Fed has moved down the path of quantitative state-contingent forward guidance over the past year—providing an indication of how economic variables will guide the path of policy….
aware of the inherent time inconsistency problem in forward guidance. The nature of this increase in uncertainty could have negative consequences down the road.”

Why ?

“Given the focus data-dependence, calendar and event risk become increasingly important for any directional position. Two weeks would be the minimum we could comfortably recommend buying risk with non-farm payrolls for September released October 4th.”

So there is no time for big time analysis or macro projections because it could be wiped out on a whim.

If we are going to be sitting on the edge for an OcTaper, NovTaper or DecTaper, anything could be the trigger.

FOMC voter Bullard was on TV yesterday causing a quick U turn in equities.

“Bullard Says Taper Possible Next Month After Close QE Decision

MICHAEL MCKEE, BLOOMBERG NEWS: You talked about the Fed chairman speaking over and over again about if the data – the Fed chairman didn’t speak after mid-July. The vice chairman didn’t speak at all since the tapering talk began. So can you really say that markets got this wrong? Do you have a communications problem? Or do they have a listening problem?

BULLARD: No. I think there was Fed communication and the committee does get out and try to communicate as best we can. And I think one of the things that happened between the July meeting and this meeting was weaker data came in. And markets did ratchet back their expectations for tapering. We started talking about a smaller taper. And so one other challenge I would have for all of you is how much difference is there between zero and $10 billion.

Bullard called October a “live meeting,” because “it’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a
small taper in October.””

Citi Asset Allocation Recommendations favor an overweight position in equities, an underweight on government bonds, a small overweight on credit, and an overweight on cash. “We believe equity returns over the coming months should be boosted by stronger global growth and cautious positioning. In particular, we also believe that an improving macro cycle is likely to lead to better returns in equities than spread products (adjusting for the duration effect).” Source : Citi


“Inflows into US equity funds rose to $23.1bn. This from an already strong $13.2bn inflow last week. As BofAML notes, this is the second largest weekly inflow since at least 2000 – which, coincidentally, was the last time a bubble of this magnitude…. ”

“(Reuters) – Investors poured a record $26 billion into stock funds worldwide in the week ended September 18 as global markets rallied on expectations that the U.S. Federal Reserve would maintain its easy-money policies, data from a Bank of America Merrill Lynch Global Research report showed on Friday.

The inflows into stock funds were the biggest on records dating back to 1992, according to Bank of America Merrill Lynch. U.S. stock exchange-traded funds attracted $16.9 billion of the total inflows, according to the report, which also cited data from fund-tracking firms EPFR Global and Lipper.”

And not just into equities. All the money on the side is now flowing back into EM FX with largest inflows since May. Strategists have found their voices again

“If we are right on a better growth outlook for emerging markets, EM equities are likely to be the preferred asset class. Our equity strategists have already upgraded some time ago the asset class, mostly on valuation grounds. … fundamentally growth momentum in EM is key for better performance. …. The stabilization of growth momentum in EM has already led to a rally in EM equities. If we are right and EM growth momentum will improve further, this really will have legs, especially now that the risk of tapering is reduced.” Source : Citi


“it is important to not overestimate the impact of this week’s news. The EM accounts for nearly all the downward revisions to our global growth outlook since the start of this year. This disappointment largely reflects the unwinding of the domestic credit cycle that kicked into high gear following the global financial crisis as well as a growing concern over depressed corporate profit margins in the face of weak pricing power and strong wage growth. Consequently, we believe a delayed Fed tapering buys time for EM policymakers, but does not change the nature of the adjustments that lie ahead.” Source : JPM

My friend Basil asked me what I thought ?

Yes. We had a relief rally and we will be hanging on a thread till the next Fed speak and the NFP in less than 2 weeks. We are still in the early stages of some global economic overhauls in some of the EM countries. The market is tired of the Fed’s cry wolf tactics and, in the past months, have come to terms that a central bank cannot be buying bonds forever.

I am not sure if it is good sense or short sighted folly but in the past week, I discovered a new peace in daily trading. Just from day to day without a strong view. It is also to do with this new trading system I am experimenting with after attending a 100% make money (???) class that taught a certain candlestick signal which was pretty simple and supposedly quite fool proof. For currencies, it has worked quite well which I am assuming because the market really does not have very strong convictions and fickle turns are there to profit from.

For the portfolio, I added some VIX on Thursday to exploit the pullback in UST and the S&P after the rally. But that will be a short term trade.

I say price action suggests a very skittish and whimsical market. It will be a painful month end coming up, portfolio adjustments will be balanced between profit maximisation and future risk rewards. And we will be looking fearfully over our shoulders all the way which makes no view a good view.