The FOMO (Fear-of-missing-out) elliptical rally changed last week into a more fatalistic bounce back to trend, a forced buy-the-dip. The risk-reward for owning equities over bonds remains central to the trend up, writes Bob Savage, CEO of Track Research over the weekend.
While many would like to describe the last three weeks of market trading as a healthy correction and a trend confirmed, others will be noting the shift in volatility and correlations.
The central question for 2018 is whether we have decided to ride a tiger and now are afraid of getting off – the FOMO (Fear-of-missing-out) elliptical rally changed last week into a more fatalistic bounce back to trend, a forced buy-the-dip.
The risk-reward for owning equities over bonds remains central to the trend up, mixed with the U.S. tax reform support and the inflation fears.
The reality abroad maybe something different and that will be the story to focus upon in the next few weeks as the Italian election, the new Merkel coalition and the ongoing Brexit talks drag the ECB decisions back to a weaker political reality over the risks of too easy money policy.
The euro (EUR/USD) relationship represents the balancing act of the tiger trends ride – where easy money meets politics, as the U.S. has discovered, deficit spending amidst full employment stoking even more growth begets inflation.
The elixir that drove many to invest in the US in 2016 and 2017 now proves to be a curse. The threat for Europe rests with the ECB tapering and rate normalization process as it collides with the switch from Draghi to Weidmann.
The risk of 1.25 EUR ending the USD selling and switching the paradigm of fear of U.S. deficits to something else – like an FOMC raising rates to match real growth – or perhaps of real rates driving global capital flows.
Where the tiger runs regardless of the rider maybe the short-term factor that determines the danger of a dismount.
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