The major equities benchmarks are right now [Wednesday afternoon] extending the slide which they commenced earlier this week, after simmering uncertainty over the situation in the Middle East tipped over definitively into ugliness – with authoritarian crackdowns in Libya at the fore, prompting another rush to the exit from ‘risky’ assets.
This week’s swing in markets to a general ‘risk-off’ stance follows what seems to me, a rising murmur of commentators over the last few months calling for an overall correction in major risk markets, principally stocks.
For instance, take a look at this skit by renowned market watcher Paul Farrell.
He’s experienced enough and savvy enough not to fall prey to modish opinion on the downside or upside. But he even goes so far as to call a “market crash” for later this year:
As for myself, I don’t know if this is a market correction or not. If you’re looking for a definitive answer – please stop reading – I don’t claim to have one!
Still, it can’t do any harm to look at some ‘red flags.’
Last week I noticed some Goldman Sachs equity trading strategists quietly published some views after conducting a similar exercise.
Amongst the things which Noah Weisberger, Kamakshya Trivedi, Dominic Wilson and Aleksander Timcenko pointed out were:
- 10-day realized volatility in the S&P 500 had reached around 5.
- Portuguese yields at or close to all time highs above 700 basis points – remember Portugal sovereign debt has been the most recent whipping boy of players of the euro zone peripheral sovereign debt meltdown. 7% appears to be the interest rate at which the ECB sends in forced help, judging from the recent experience of Ireland.
- The latest Merrill Lynch fund manager survey shows staggering results with a major capitulation in emerging markets, extreme bullishness on equities and extreme low levels of cash.
- Developed markets re-pricing interest rates judging by interest rates futures, after years of ZIRP – zero interest rate policy – suggesting that a meaningful shift of policy taking place…
- And of course, protests in the Middle East continue to gather pace.
- General activity across ‘European 1’ [a rather elitist definition of the most ‘developed’ parts of Europe] delta [basically risk-seeking behaviour] has slowed. “This latest attempt to break out is taking place in thinner volumes than we have seen all year,” Goldman’s strategists noted
- They also saw something in the significant outflows from leveraged short US equity ETFs – following heavy inflows in prior weeks. They saw that as “negative from contrarian perspective…we believe the reversal could be signaling a near-term market top because our research shows that leveraged ETF flows are a superior contrary indicator.”
Beyond the no doubt highly partial view which the largest investment bank in the world is promoting [at least to clients] an interest rates strategist in this parish noted the front-month contract of the US 10-year Treasury futures was testing a 5-month downtrend on technical charts – at the same time as stocks were also “toying with critical supports…I don’t think we need to see a great deal further down in equities to see some asset reallocation back into bonds from stocks.”
However he was at pains to also point out that “bond bulls/equity bears have been disappointed before over the past couple of months, so it is worth considering buying a 10 delta call spread for a decent risk reward.”
Another balanced voice was that of a US independent economic consultant who has many governments, investment banks and wealthy individuals as clients.
“Last week, I reiterated my recommendation to overweight oil and gold given the proliferation of chaos in the Middle East, which has a long history of chaos.”
[His writing is well-known to be wry, sardonic and not too reverent.]
“I should have specified Brent crude oil, which jumped 2.2%, while WTI crude oil trailed with a gain of 0.7%. Among the precious metals, I should have picked silver, which jumped 6.6%, outperforming gold’s 1.4% gain.”
Aside from careful selection of sectors, he pointedly did not provide any globalized bearish cautions with respect to risk markets.