1H16 Market Thoughts : Did Somebody Die ?
With worries mounting daily, the latest being BREXIT fears, markets are mighty lucky mass hysteria has not broken out for the lack of a potential hard landing for the global economy. Putting a perspective on the year, we are not living in more fear of a recession than we were for the uncertainties back in 2008 -2011 and we had financial markets peace between 2012-2015 when the Fed announced that they would maintain the Fed Funds Rate near zero “at least through 2015”.
The final week of 1H16 has been one of guarded optimism as equity markets reversed their courses, in an unhealthy expectation of stimulus to be expected from the Bank of England, which cannot possibly match Japan’s on scale, for sure, and yet a nice-to-know fact that turned the Footsie Index into the best DM (developed market) performer for the week, the month, second quarter and the year – up 5.37% since January compared to the Dow Jones +3%.
Fortune favours the brave ? And we have the investors like George Soros short Deutsche Bank stock (-6% for the week) and someone else long Gold (+2% for the week) to manage their Brexit pains when the unassuming winner from this has been errr, scandal-plagued Brazil which managed to ekk nearly 9% returns as a stock and currency investment in just a week and winning hands down for the year at 42.87%, stocks and currency combined, making Gold’s 29% gain for 2016 look slightly paltry.
In essence, we have half the world behaving like somebody has died and the other half, hard at work, behind the scenes, putting their money to work which teaches us a fine lesson on reading too many bank reports and news stories telling us that the end is nigh and we should be on alert.
For all it is worth and so much for the gloom and more gloom that appears to be affecting the bankers and central bankers we meet and hear, the year has been pretty fabulous for every single asset class except equity markets and Deutsche Bank shareholders (-44% year to date).
6 months ago, it was a different story with bankers calling for a Crude Oil collapse to $10 (the most dismal forecast I came across), the world was expecting a spate of oil related corporate bankruptcies, China to capitulate, investors were advised to hoard the USD and dump their gold while expecting 2.5 Fed rate hikes for 2016.
I called for a “selfie moment” then, when 2016 was looking like the hardest year to make money in 79 years, after its first fortnight right after 2015 was officially declared the hardest year to make money in 78 years.
When I wrote “Analysts are now trying to outdo each other in predicting how badly Keppel and Sembcorp Marine’s order books will take to the rout in Brazilian O&G companies, calling for 30-70% of orders being cancelled, none too worried about their cash positions, sitting on their billions in cash with little due in terms of loans and bonds (Keppel none in 2016 and Sembcorp, S$ 224 mio).”, I had not expected Brazil to outperform oil by that much although I did say that Keppel Corp has seen its price lows.
Nearly 6 months later, with Crude Oil up 32% for the year, we would think our troubles are over except that we have newer and bigger problems at hand. For you see, it was not too hard to see the fault lines like the ones I wrote about in December 2015 in the spirit of the Ghost of Christmas Yet To Come.
No. We cannot say it has been easy for 1H16 has been a hard fought battle compared to the relative lull we had for the past 4 years just going by the number of times the VIX (volatility) Index broke above its 10 year average of about 20.5 and the official bear equity markets scare we got earlier in Jan-Feb.
Weekly candlestick chart of the VIX Index.
The volatility of 2016 can only be attributed to an underlying theme of discordance or discord in the marketplace, where opposing views clash as much as political views are doing right now in the US, UK and much of the world.
It can only be described as unhealthy by the observer, if bonds are delivering healthy returns with many displaying double digit returns mainly from capital gains in their yield collapse or price gains. When inflation is near absent, or diminishing quickly, even as commodity prices rise, signals confusion. When the Bitcoin becomes the best performing asset (+56.75% year to date), doubling the return on safe haven Gold (+26.41% year to date). Most of all, when basket-case Brazil, still mired in its worst recession amidst political instability, the Zika virus and corporate scandals, becomes the best performing market, currency gains included or excluded, in the investment world for her bonds, equity market and currency.
When I asked my good friend, a trader, what she thought of the mini Brexit crisis, for she has seen too many of such before, the response was “Has somebody died ? If no, then it will be business as usual.” None of that “this time is different” views that we read about from those who gunning for fame or even the tempting “buy into the crisis” trade that some have been chasing after.