(C) Ricochet Alternative Asset Management (2012)
Global markets over the most recent 5 day period trended downward, notably the Asian indices experienced severe tail-risk on downside volatility. The Hang Seng for long only portfolios experienced kurtosis that breached the 99% confidence level, or an alpha (for statisticians) of .01. The slowdown in China coupled with the stronger Asian currencies along with capital inflows into bonds due to perceived instability with the peripheral European elections and the slowdown in U.K. and broader EU growth caused a sell-off in the Asian indices. The Bank of Japan floated into the market deposits of foreign currency and the People’s Bank of China reduced their reserve ratio requirement by half a percentage point. Chinese banks holding less denominated fiat should facilitate greater economic activity which equate to a marginal rises in inflation throughout China provinces. A quick observation reveals Asian indices have not experienced this level of volatility over the recent weeks. Tail risk, or downside volatility, certainly seemed, had ostensibly been reserved for the U.S. and Europe.
In U.S. markets, the Dow closed down -1.67% over the recent week with a gradual sell-off over the course of the 5 day period. The tepid decline over the period occurred as the market requested further fed intervention. As a function of asset deflation, the stronger dollar has initiated the downward adjustment in P/E, for U.S. indices to which the Nasdaq (down -.70% on the week) has recently seen major declines and therefore did not lead the bearish U.S. indices, as did the Dow. The S&P closed down -1.18% after seeing marginal buying on Monday and Thursday thereby followed by a sell-off on Friday. Capital inflows to U.S. bonds also increased, as the 10yr yield spread of 1.84% – 1.88% enabled the Fed to further repress artificially the U.S. housing market from further downward spiraling via purchasing of $6.8 billion in mortgage bonds.
The U.S. markets over the next week should continue to trend downward as the dollar continues to strengthen as a reserve currency. Inflows to U.S. bonds and into government bonds in general will cause continued fluctuations in the forex markets which will effect yield in the equities and commodities market as well. Cheaper oil reduces PPI and enables lower costing consumer durable (durable >1yr) an non-durable goods (<1yr durability). Industrials and manufacturers and airlines will also have cheaper input costs with oil. I recommend the following:
AGRPY – ABSA Group
UNL – US Natural Gas Fund
ANZBY – Australia and New Zealand Banking Group
The IBOVESPA closed down -2.26% after experiencing buying on the open and throughout the day on Monday. The sell of followed as capital inflows into South American debt notably Mexico and Brazil. The IPC closed up 9.45% as Mexico continues to be an area of interest as consumer, construction and tourism stocks remain strong. The IPC is expected to realize further increases in valuation going forward into the summer months as commodity prices fall and the dollar appreciates.
In Europe, the IBEX closed up 1.74%, the DAX closed up about .30%, the CAC 40 closed down -1.0%, the ATX (Vienna) closed down -1.86%, the FTSE closed down -1.4%, and the SMI (Swiss) closed down -1.68%. The relative strength of the markets can be seen as Spanish equities received a boost after the Spanish government agreed to recapitalize the failed Spanish banking system, which was over exposed to commercial and residential real estate. The DAX should remain relatively stable, with a 1.0% to -1.0% range over the coming weeks with upside volatility. Italy appears to be a cause for rising concern and is a market I recommend to stay away from. There should be continued selling off of Italian equities and the yield should begin to rise, contracting the spread between the Italian/Spanish 10yr bond yield. Swiss bonds are a safe haven and is reflected via the buying of Swiss securities.
As mentioned in the prior research note, the Indian stock exchange continues to be a tail-risk. The BSE closed down -3.20% and continues to remain risky with downside volatility going forward. The TA 100 (Tel Aviv) closed down -2.03% on worries of a global macroeconomic contraction, which equates into profit taking.
The Nikkei 225 closed down -4.55%, the Hang Seng closed down -5.32%, the Straits Times closed down -3.45%, and the TSEC (Taiwan) closed down -3.89%. As mentioned in the first paragraph, the Asian markets had sold off and all did experience a tail-risk event with downward volatility. The Asian markets will continue to be volatile going forward as Asian central bankers try to spur growth without artificially increasing inflationary drag on the economy. Exports will be critical to Asian equities going forward. The TSEC is a clear buying opportunity.
Gold down -3.16%, copper down -1.69% since Monday’s opening
WTI traded down to $95.57 and is related inversely to movements in Natural Gas.
Oil and Gold should continue to trend downward. Gold will also be a leading indicator of crude as we head into the summer months with a correlation beta of .4%.
There is strength in the Mexican and U.S. government bonds. The yield on the Mexican 10yr is 3.29%, higher than many safe haven bonds however the premium on the principal is also rather high at $140.00. The Australian 10yr yield has decreased notably from 4% approximately 1 month ago to a current yield of 3.28% with a principal premium of $121.13. The Swedish 10yr government bond is essentially a money market instrument yielding 1.48% with a safety premium on principal of $118.55. The Dutch 10yr is also a flight to safety with a yield of 2.02% and a principal premium of $102.04. The Spanish 10yr yield of 5.96 is getting closer to par, with principal on the bond valued at $99.00.
US treasury 10yr yield range of 1.88 -1.84 low of 1.82
German government 10yr yield range of 1.58 – 1.516
Portuguese government 10yr yield range of 11.10 – 10.938 high of 11.53
Spanish government 10yr yield range of 5.73 – 6.01
U.K. government 10yr yield range of 2.0 – 1.963
Netherlands government 10yr yield range of 2.14 – 2.03
Austrian government 10yr yield range of 2.62 – 2.515
Italian government 10yr yield range of 5.43 – 5.60
Poland government 10yr yield range of 5.29 – 5.376
Greece government 10yr yield range of 20.57 – 24.75 high of 24.75
Indian government 10yr yield range of 8.62 – 8.54
Australian government 10yr yield range of 3.56 – 3.287 low of 3.287
Thank you for reading. Have a wonderful Mother’s Day and close to your weekend.
Vidia – Founder/President & CEO – Ricochet Alternative Asset Management