Author Archive for RMDfx

Our 2012 Awards to the Markets


The best way to describe this year is to say that Pavlov’s Dog was fed. Market participants ignored an onslaught of softer data , tensions and headline gyrations, believing that ‘Bad news was good news’ and so salivating at the thought of Central Banks being called into action. And they did ride in.

The big question to ask going into next year is whether these Central Banks are now ‘all in’ and have overextended themselves and would be powerless if the post-crisis deleveraging era continued to show anaemic growth. Diminishing returns and loss of potency and credibility are a big danger going forward. Here, we give out awards to the markets for this year :

Best Trader This Year:

Shinzo Abe put in a late effort here with his short JPY trade. However, we feel Mario Draghi nailed it on the 2nd August. EURUSD never looked back from the 1.20/1.21 area after this statement:


The ‘What Eurozone Crisis?’ Award This  Year:

Despite all talk of meltdown, breakup, fragmentation within the EMU, the DAX and the CAC-40 have made multi year highs. We give the award to the DAX just because the CAC-40 is French:

Note in the Draghi picture above where the DAX was on the 2nd August, so he may even have a claim on best equity trader too.

The Trader With The Least Return On Capital This Year Award:

We think this has to go to Ben Bernanke: QE3, QE4, extending Operation Twist, Trillions of USD of Balance Sheet expansion, and yet the US Bond Markets have done very little this year. To the extent that several big houses are warning of a big bond correction in the coming year (although they did say that for this year too). It looks like the Fed Chief will struggle to squeeze more out of QE as diminishing returns have set in and efficacy has been lost. If we were offering an award for ‘distorting the bond market’ as well, the good Doctor would be going home with a double.


The Best Bond Trader This Year:                                                                                            


That man Mario Draghi again, we think. After all the efforts to smash the Eurozone and fragment it and kick Spain out and corrupt Italy and discredit France, Mr Draghi rode in and told the world he ‘would do whatever it takes to save the Euro.’ Just via the threat of unleashing OMT and by keeping the countries strictly adhering to their reforms, Mr Draghi has played a huge part in compressing EMU Risk Premia for this year. Can he keep it going? Many big Houses are recommending long Spain and Italy bonds next year (didn’t Mr Draghi work for one of those big Houses?):

The Central Banker Who Got His Way The Most Award :                           

This award must go to the Fed’s arch dove, Charles Evans. Not only did he get extra QE3, but he also got QE4 and they even adopted economic thresholds for interest rate setting after his ‘Evans Law’. Congressional Medal of Honour next?

The Central Banker Who Didn’t Get His Way Award: 

Jens Weidmann. Easy One that one, although Mssrs Lacker, Plosser and Fisher at the Fed have not had much to cheer, policy wise, this year.

The Biggest Non-Economic Tape Bomb Award:

We hazard that across a few large financial centres, the rather well kept secret and then release of the news that Bank of Canada Chief,Mr Mark Carney, will be the next Governor of The Bank Of England must have raised loud gasps of exasperation, huge commotion and plenty of debate. (Reminds me of when Sven Goran Eriksson was announced  England manager in 2000).

The ‘Small Country With Bulletproof Currency’ Award:

NZDUSD and NZD crosses. Not sure if the Government there likes that and the rhetoric is getting a touch louder. We shall see.

The Most Frustratingly Out Of Line With Fundamentals Currency Award:

AUDUSD and AUD Crosses. You can argue slower growth, mining investment cycle slowing, lower investment intentions, subdued business and consumer confidence, weak private sector credit growth, lower terms of trade and commodity prices, upcoming austerity, narrower rate differentials as the RBA cut etc, yet the AUDUSD (on it’s knees a few years ago) has only spent 23 days below parity this year. The hunt for yield and diversification trumps all else. How long will that last before reality catches up? Intervention anyone?

The ‘We Beat Everyone Off And Come And Have A Go If You Think You Are Hard Enough Award’:     

The SNB. They won this year, despite months around 1.2005/1.2010 in the EURCHF cross as huge huge volumes went through as allcomers tried to see what exactly would happen if the peg was pierced. We heard of Yards of stops and that instant moves to 1.17 would happen etc. However, the SNB committed itself, kept it’s vow to buy FX in unlimited quantities, held in and has kept all away. However, their EUR diversification policy has irritated other Central Banks as they distort other currencies and cause unwanted currency movements outside of Switzerland. Do they really care? No one cared about the Swiss when EURCHF was sub 1.05 last year.

The ‘Is it Slowing Down And Maturing Award?’:                                                             

The Gold Bull Market. Gold is up 8% this year. One could argue that, relatively speaking, that is a disappointment this year, given all the easing policies carried out by the USA, EMU, Japan, UK, China, South Korea etc. In the last week after QE4 and in anticipation of the new dawn of Japanese reflation and after several Central Banks and big hitting punters have added to their Gold holdings, Gold has traded poorly. A warning?

The ‘Unable To Move Far Away From 1.60 Award:

GBPUSD for yet another year.

The ‘Buy It Because They Don’t Mind You Buying It’ Award:

The NOK. After one 50bp cut earlier this year to try and stem the strength of the NOK, the Norges and the authorities have not troubled the markets since. The long NOKSEK trade has been bread and butter for the funds and Norway is seen as immune and oblivious to any overseas troubles and strifes as it’s Brent Oil based economy hums along and it’s housing sector continues to boom. Can this trade just keep on giving?

The ‘Is It Going To Happen This Time’ Award?  

The Short JPY trade. Mr Abe’s LDP have just won a landslide victory and the market had gone super sized short JPY ahead of his proposed radical reflationary policy. Thus far, the market has been correct. We are worried that Mr Abe may be toned down by the mainstream LDP members and fiscal constraints may limit this reflation trade. However, all and sundry are going for the ‘this time it could be for real’ attitude.

The ‘I Have To Trade It Because It Is One Of The Few Markets That Moves’ Award:  

The Bund. Anyone with a Bund trading limit insists on getting stuck into this one. In fairness, on most days than not, it offers decent ranges and trades with a modicum of logic, paying respect to news and fundamentals. We wonder if too many now will have Bund trading limits.

The Most Commented Upon, Most Written About, Most Blogged About, Most Watched Market of 2012:

The Potential Next Bubble Market Award:

India’s Sensex. Overvalued beyond belief relative to fundamentals.

The One Phrase That Caused Tremors And Hushed Voices This Year Award:


The Most Volatile Market This Year Award: 

That’s a tough one this year but we had a look around and we saw that China’s short end interbank money market zings around in 50 and 75bp moves daily!! So, along with the Shanghai Index, which has had a mind of it’s own this year as it sold off when all else were rallying , then has a 4% up day when all else is correcting lower, we deem China to have the most volatile markets. I wonder if traders will ask for bigger trading limits here.

The Least Volatile Market This Year Award:

We looked at 3 month Eurodollar futures this year and thanks to Dr Bernanke’s formula for success, you cannot really do much with them as the March13 contract shows :

However, we have decided that this award for the ‘least volatile market’ this year should go to Volatility itself, as measured by the fear index, VIX. Despite occasional feelings of pandemonium around the world, there was no panic, no hedging, no put buying on equity holdings, no liquidations as market players took all in their stride. Even the crash in Apple did little to arouse this guage of sobriety. The VIX has not been above 20 since August and has not traded above 30 this year. Compare to previous years:

The Fiscal Cliff is the major unresolved market event to see out this year. Resilience to the negative headlines has been impressive, but markets are getting thinner and there is a danger that fear could set in as the stalemate continues. The permutations of outcomes are large , and many are now putting positive spin on the ‘temporary drop off the cliff’ and retroactive deal scenario. It’s strange that in a year of such relative stability, wecould see the greatest uncertainty and volatility and chaotic movements in the last 2 weeks. Alternatively, like many other potential market moving events this year, it could be a non-starter and a damp squib.

So all that’s left now is to wish you and all your families a peaceful, safe and happy holiday period. We will update any market thoughts over the next couple of weeks on Twitter (that way brevity and celerity are assured for all).

We would like to thank you all for your readership and support over this year and for all your input and messages. We hope we have been worthwhile reading and we wish you the best of success, joy and prosperity in 2013.




As we approach the anniversary of the week of the tragic Fukushima earthquake and its nuclear fallout briefly crashing the markets , we finally see combined risk assets getting their first co-ordinated hammering of this year. From the London cabbie to the Tibetan monk, this pullback was looked for everywhere. The question now is can this go more? Or is this a healthy retracement in an overbought market , with the uptrend intact?

Several indices, commodities and risk currencies made year highs in unison on 29th February before the Bernanke out of turn comment . Matters then took a different shape: the sell off in gold and silver became very significant indicators , with the latter mirroring the end of April sell off last year , which preceded by a few days the 2011 peak in equities. The market developed a concern over the turning off  of the liquidity taps and the liquidity driven rally screeched to a halt . In one case ,in the UK, despite all the excellent variables of green shoots and stability , the FTSE had not been able to push on for a few weeks, and has now moved a fair bit away from the highs as talk of earlier MPC hike votes surface and mortgage lenders cheekily lift their rates. In another case, India’s Sensex had already been getting beaten down and we saw their slowest GDP in 3 years and their manufacturing sector go into contraction. The excessive hiking had returned to hurt the lead BRIC market.

Attention then moved to China lowering it’s growth target. To me, this is a sideshow as it is almost certain 7.5% will be exceeded. They have had an 8% target for 7 years and that has never been breached. The concern is more to do with drops in trade and exports  from neighbouring countries like Japan and Australia, as there maybe less demand for raw materials, machinery, autos, shipping and commodities. So there is fear FOR the trade balances of nearby countries . The Chinese want a more efficient, sustainable growth model in a consumption dominated economy(currently 38pct of GDP, vs 70 pct in USA). So is China retail sales now the new vogue number ? Note USDCNY fixings are being manipulated upwards, and talk of widening the fluctuation band cannot enhance the stability of the ASIAPAC currencies.

Then we had concerns over Greece debt restructuring and the Thursday deadline for voluntary participation in the debt swap. Apparently the bill for a disorderly Greek default stands at a trillion EUR. My question here is that would this lead to serious deleveraging and repatriation by the EU banks?  When Lehman went under, USDs were needed . Would, then,  in this case, BOTH EUR and USD be needed at the expense of all else ?

The stream of news continued to read nastily a la last November/December : Iran tensions ; bloggers constantly pushing weak Spain news ; refocus on record  ECB balance sheet expansion to 3 trillion EUR and even back again to watching record amounts of o/n deposits at the ECB increasing on a daily basis. Throw in tensions between the BUBA and Don Draghi over too much money reaching weaker institutions too easliy due to easy collateral rules , and the end result was , as of writing , a proper , co-ordinated beating of risk assets : Gold took a further pummelling; copper; indices; EURUSD ; high beta currencies; periphery bonds and core bond yields. One must look at breaches of the 200DMA of a few of these. JPY and USD regained some poise, and the SNB must be staying up through the night.

Even NOK , with its immense, almost perfect, fundamentals took a whack today against the EUR, so highlighting that even when Eurozone issues are THE cause for concern, the high betas and commodities get it even more . The deleveraging trade of buying EUR/commodities on signs of risk off is still alive but massively diluted from last year. Will it restrengthen?

Finally, the data factor has been more bleak than not. In the USA, negative surprises took hold in the recent prints(durables, ISM manufacturing, construction spending,Shiller home prices, personal income and spending) and there were some nasty upshifts in the prices paid components in both ISMs as energy costs take a serious bite . Q1 GDP is being revised  to 1.5 – 2 % , down from 2.5 % . In Europe , much of the data presented has been sluggish (German retail sales, French consumer spending, EU unemployment) and CPI has crept back to 2.7pct and, again, some nasty upmoves in PMI prices paid.

As we go into the final showpiece of the week, the NFP ,the ongoing decline in initial claims is setting up expectations of a 220k+ print. I would never try to forecast NFP, I have learnt what a pointless game that is over the years. I will, however, argue that the picture for the last month may be more cloudy than seems : A US small business survey showed that hiring plans among small firms is not picking up :Total on-line help-wanted ads rose nearly 40K slower than Jan’s 61K. Also, the Philly Fed employment component dropped sharply for the last month, as did the employment components in both ISMs. So if someone asked me if I was in 220k+ camp, I would be hesitant, given all the empirical evidence on offer. But, as I say , this is just an assessment of what data I can see, and not the mug’s game of exact forecasting.

I have read that any USA QE3 ideally would have to happen no later than June as this is the cut off before the election campaign takes over and the FED becomes neutral. So all on Capitil Hill and Pennsylvania Avenue will be hoping the NFP follows the initial claims path and that this indicator (Citi Surprise Index) turns up: