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DFX Market Analyst
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  1. Happy New Year everyone! Coming to Terms with a Bear Market We have experienced a remarkable level of volatility recently, which is particularly incredible from the past few weeks considering markets were distorted by holiday trading conditions. When volatility meets thin liquidity, the results can prove explosive. That said, the intensifying fluctuation in the global financial system is not just a phenomenon that could be attributed to shallow markets as we have seen both the price-based results and the explicit sensitivity to fundamental triggers increase through the months precedi
  2. Another Week, Another Set of Brexit Scenarios It seems the weather patterns behind the Brexit seem to changing at a more rapid clip – always ending up back ‘in irons’ (pardon the nautical terminology) as the clock steadily winds down to the March 29 separation. This past week, was particularly momentous with the Prime Minister’s proposal supposedly going to vote in Parliament; but May decided to pull the vote before the allotted session as it was clear it would be voted down handily. And, considering the MPs had voted the week before to give themselves more power in the event the PM’s eff
  3. Make or Break for Brexit? There have already been so many twists and turns in the UK’s efforts to negotiate its separation from the European Union that that investors are getting dizzy. It is troublingly difficult to gain a reliable bead on a probable outcome for this stalemate, but the lack of time and dwindling hope of an outcome that will satisfy the majority of those involved raises the threat of a ‘bad’ outcome and even worse market response. This is not one of those events where ignoring the risks can prompt complacent gains. Once again, we are coming up to a key milestone in this
  4. Weeks Left of Liquidity, A Laundry List of Unresolved Fundamental Threats We have officially closed out November Friday and we are now heading into the final month of the trading year. Historically, December is one of the most reserved months of the calendar year with strong positive returns for benchmark risk assets like the S&P 500 along with a sharp drop in volume and significant drop in traditional volatility measures (like the VIX index). There is a natural, structural reason for this moderation. The abundance of market holidays, tax strategies and open windows for various funds
  5. A G20 Meeting of Extreme Consequence As far as summits for leaders of the world’s largest economies go – in other words, an already very important affair – the gathering in Argentina this coming Friday and Saturday is crucial. There are a host of global conflicts that will inevitably be addressed at this gathering, but certain aspects will preoccupy the market’s immediate focus. It will be important to recognize what will carry the weight of speculative interest. On the one hand, there are discussion points of great consequence socially and culturally, but those issues will not show their
  6. Another ‘Brexit Breakthrough’ Falls Apart Yet another potential breakthrough in the Brexit stalemate seemed to be hashed out at the beginning of this past week following hours of legal negotiation and closed doors discussions. Supposedly, a draft bill was worked out that both the Prime Minister and top European Union negotiators were comfortable moving forward with. If there were only two parties which needed to be satisfied in this divorce, that would be that. However, there are multiple parties whose needs in this debate are collectively at opposite ends of the spectrum. And, that inabi
  7. Will Holiday Conditions Save Us from Fundamentals and Speculation? Normally, there is not a strong appetite for holiday trading conditions because it can materially slow markets – and most traders seek out volatility, even if it is as much a risk as a basis for potential. However, this year, there will be a strong appetite for the typical conditions associated with the time of year. In 2018, we have seen an extraordinary bout of volatility with dramatic bear waves in benchmark risk assets like the US indices through February and October while the progress of the previous years of this de
  8. Remove the Political Bias, Focus on the Volatility There has been plenty of political risk keeping the markets at a steady simmer these past months. Some situations like Italy’s budget stand-off with the European Union and the Brexit negotiations are more overt concerns. However, the general rise of populism and the erosion of cross border diplomacy (trade wars, sanctions, failed trade deals, etc) represents a more systemic risk. Yet, despite the ubiquity of this fundamental influence, there is an explicit focus on this theme through the coming week in the form of the United States’ mid-
  9. Risk Trends – Monitor Liquidity Closely Sentiment is turning increasingly septic across the financial markets. This past week certainly wasn’t the first week that signs of trouble were starting to show. However, a clear capitulation by one of the favorite benchmarks of hold-out bulls – US indices – has undermined one of the few reliable backstops left. The S&P 500 and Dow have been in retreat through much of October after hitting their respective record highs. Up until this past week, the slip still fit the mold of a measured retreat for which the ‘buyers of the dip’ have flourished.
  10. The United States and China Jostling for Economic Supremacy The world’s largest economies are starting to update on the status of their health. And, though it may not seem to be the case in these speculatively charged markets, financial performance relies heavily on a healthy global expansion. This past Friday, China reported its third quarter GDP reading. The 6.5 percent clip would be an enviable pace for most of the developed world, but for this debt laden country, this is slowing to a pace that is more likely approaching ‘stall speed’. In historical context, the reading represented the
  11. Risk Trends Trembles, Is it the ‘Crazy’ Fed’s Fault Market’s suffered a painful correction this past week. From peak-to-trough, the benchmark I like to refer to as a measure of hold-out enthusiasm, the S&P 500, dropped nearly 8 percent. That is still a ways from the technical ‘bear market’ designation which is a 20 percent correction from peak highs, but that scale of loss from a seemingly indefatigable climber rattles confidence. To be clear, the slump in sentiment was not isolated to the US equity market. That was just among the more remarkable victims of the speculative swoon owing
  12. It Can Be Difficult to Measure Complex Issues Like Trade Wars When dealing with a complex fundamental theme – without a binary outcome, numerous inputs and important to different investors for different reasons – it can be difficult to both analyze and trade the subject. Those are certainly criteria that would fit the ongoing trade war. It is proving exceptionally difficult to keep a clear bead on the progress of the economic conflict and the market has started to veer back into its comfortable habit of allowing complacency to take over. Drifting without accounting for clear and present d
  13. Markets Heading into October and the Fourth Quarter With this past Friday, we closed out week, month and quarter. The shortest measure was a period of consolidation for most assets – from the top performing US equity indices to the EURUSD’s make over break technical move to trade back into range. More impressive for its deviation from character (statistical norm) was the performance for the month of September. Historically, this period is one of significant upheaval for the capital markets (see the attached images). Using the S&P 500 as the imperfect standard bearer, September is hist
  14. Trade Wars Update: It No Longer Matters? Seemingly a routine occurrence for the global financial markets, we saw the state of global trade deteriorate yet again through the past week. As expected, the United States went forward with tariffs on an additional $200 billion in Chinese goods. The terms are for a 10 percent rate on a range of imports that will increase to 25 percent by the end of the year. The standard, immediate response from China was quickly implemented, but only on $60 billion in US goods. It is not clear the strategy from China as they vowed a ****-for-tat response to wha
  15. Is There an Effort to Keep Markets Uneasy in Trade Wars? How many times does something unusual have to occur before it is considered a planned? I have noted a number of times over the past month that some unexpected policy development was announced hours before the markets closed for the weekend. There is an unspoken commitment by central bankers and global leaders to prevent volatility in their respective financial markets. Volatility is the general definition of risk, and there is a clear connection between financial market and economy. In other words, no one wants to trigger speculativ
  16. Important European Central Bank Rate Decisions As we find distraction in trade wars and political risk, it is important to remember that we are still dealing with more traditional fundamental issues in the background. One of the most systemically important and extremely underpriced risks is the global market’s long-standing dependency on massive stimulus from the world’s largest central banks. That wave of easy money through massive rate cuts and largest stimulus programs has noticeably receded while recognition of more recent iterations of the collective effort have failed to earn the im
  17. A Habit of Cutting Down Progress Towards Ending Trade Wars This past week, optimism was dangled in front of the markets and violently snatched away before it became too established. We have been dealing with the escalation of explicit competition in trade policies for the since March, and each hint of progress in turning the major players back from economic stalemate has been consummately dashed. This past week, there were two fronts on which it seemed we were heading for an important breakthrough. The first upswing would come from the NAFTA negotiations. After US and Mexican officials s
  18. Add Political Risks to Our Long List of Market Concerns It isn’t like we are lacking for fundamental motivation for the global financial markets. If anything, there is a surplus of critical themes that could – if properly induced – could single-handedly turn the universal tide. Nevertheless, it seems we will have to add another principal concern to our list alongside trade wars and the transition away from emergency monetary policy: political risk. This is not an unfamiliar market concern. Concern over governments’ and their influence on economy and financial health are fairly regular occ
  19. Positioning Extremes Grow More Extreme There are a few undisputable and universal forces when it comes to the financial markets. One of those all-powerful winds is the concept of risk trends which is referred to by many names such as ‘risk on, risk off’ or referenced unknowingly when we blindly attribute market wide movement to animal spirits through technical cues, smart versus dumb money, panic to greed. Another of these truisms is the allocation of capital. While total wealth does grow and contract, it is apportioned to some market whether that is emerging market equities to US Treasu
  20. It is Not Wise to Start Financial Fires in a Market so Parched for Value The financial markets find themselves in between two storm fronts. On the one hand, there is the seasonal liquidity drain that is associated with Summer trade. More historical norm than actual exchange closures, the ‘Summer Doldrums’ present a consistent curb on volume, open interest, volatility and productive trend year after year. However, the restraint is not guaranteed. Though not as common as those Fall (for the Northern Hemisphere) triggered crises and deep bear trends, there are certainly bouts of panic that o
  21. US-China Trade War Moving Beyond Boundaries As expected, the relief from trade wars didn’t last long. Not a week after US President Trump and EU President Juncker announced an armistice on tariffs between the two dominant economies, the former revived pressure on its favorite target: China. Trump had issued threats of escalating tariffs against its trade-dependent counterpart over previous weeks, but the impact of the warning seemed to come with shorter half-lives than what we had experienced through previous iterations. With a strategy that seems to center upon keeping steady pressure on
  22. It certainly can be argued that the BoE shouldn't have hiked rates owing to the subpar showing on the standard mix of fundamentals they look for when they deliberate such actions. That said, I think the circumstances for policy currently are such that they cannot follow standard procedure. Though their mandate is to target inflation, there are many long-term factors that go into a steady bearing of medium-term (their term for roughly 2 years forward) price stability and there are is an underlying interest to promote economic activity and maintain financial stability. A rate hike of
  23. Trade War Relief, But How Much? Finally, some trade war respite. Or at least, what looks like relief. Following week after week of steadily escalating threats and a few decisive actions (and retaliations) along the way, there was finally a joint statement of agreement between key global leaders. Following their meeting in Washington DC, US President Donald Trump and European Union President Jean Claude-Juncker issued a statement of success this past Wednesday. Any pause in this quickly ballooning threat to the global economic and financial order is welcome, but that doesn’t mean we shoul
  24. Just When You Think Trade Wars Can’t Grow More Extreme… The last we left global trade wars heading into the close Friday July 13th (the week before last), the situation was already firmly planted in worrying escalation with little sign of relief in the sidelines of diplomacy and political cheerleading. The United States was still applying its metals tariffs against competitors and colleagues alike, the $34 billion intellectual property oriented tariffs were in place against China (not to mention China’s retaliation upon the US), and threats of a massive escalation by the Trump administra
  25. So Much Risk, Status Quo is an Improvement In individual trading sessions or entire weeks where there is an overwhelming amount of important, scheduled event risk; we often find the market frozen with concern of imminent volatility. Even as a remarkable surprise prints on the docket early in the week, the impact it generates is often truncated by the concern that the subsequent release can generate just as much shock value but in the opposite direction. Many opportunities have been spoiled by such situations. Yet, what happens if we face the same situation on a grander scale? What i
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