The Market is Like a Dog with Two Tails, Beyond Happy
02/05/2018 11:24 am EST
Perhaps the biggest fear for February isn’t the repeating of January trends but the complacency from big gains with little to derail them ahead. Until this changes, the market is like a dog with two tails, beyond happy, writes Bob Savage, CEO of Track Research Friday.
In the middle of January, many see markets as dangerous as volatility rises, correlations breakdown and the powerful trends extend for oil, the USD, equities and gold. Value concerns have returned but like a dog with two tails, the powerful treats of better 4Q earnings and ongoing global growth support the rush of money to risky assets everywhere.
The break of the USD to U.S. rates has perplexed many last week as the USD accelerated its downtrend after Mnuchin comments at Davos and after the ECB Draghi did less than hoped to talk down the euro (EUR/USD).
The focus of rate/USD disconnect was in the Japanese yen (JPY/USD) and Swiss franc (CHF/USD) both of which moved sharply lower as fears about the U.S. starting a larger trade war, talking down its currency and the role of central bankers playing with their reserves all culminated in a large technical breakdown to fresh 3-year lows.
The question for many is when all markets all markets start to pay attention to the USD weakness. Clearly, some have, as the German DAX, UK FTSE and Japan Nikkei all suffered last week in part because exporters were hit on currency gains.
This wasn’t true for China or many other emerging markets in part because fair value for those currencies remains far away. Value in forex is a hard thing to measure with PPP the best to offer, but hardly a good forecaster for the medium term.
Value, growth, trend and momentum factors are all in play in January 2018 and as the month comes to the end, many are extrapolating that as this month goes so goes the year.
There will be the usual focus on how governments and central bankers respond next to these forces along with the questions of how speculators play out their positions and leverage.
Perhaps the biggest fear for February isn’t the groundhog and the repeating of January trends but the complacency that ensues from big gains with little to derail them in the calendar ahead. Until something changes, the market is like a dog with two tails, beyond happy.