Monthly Archives: August 2015

The Fed May Surprise Investors in Sept

meMarkets are awash with discussion about the probability of the FOMC raising rates at its September meeting. As equities swooned over the last two weeks, consensus seemed to shift, toward a December rather than a September hike. And as I write this, media like CNBC TV are putting the probability of Sept hike at 30-40%.

CNBC has its analysis of market expectations wrong, as do other media channels. Understanding how the Fed is going to raise rates is essential, because market prices currently show a strong assumption of a September hikes. Conventional expectations estimates are not calibrated to the exit from zero interest rate policy. Continue reading

Summertime Madness Part 3 – August Chaos!

meSo much for my insights. In Summertime Madness, I proposed that August might be a quiet month, with low volatility. Instead we had a record spike in volatility. But, is it justified? When I spoke of not exepcting volatility, I thought in the sense that, by end of August the outlook wouldn’t have materially changed.

Right now prices are dramatically off compared to a month ago. But is the backdrop significantly changed? Continue reading

China Moves Clumsily Toward a Free-float

Well, my recent posts about not expecting August volatility, whilst pertinent, are being put to the test. My funky list of reasons for possible August vol didn’t include the idea that China might decide to make a disruptive shift toward a free-floating currency.

To be sure, such a move is welcome, a free-floating yuan could greatly contribute to global diversity and international financial security, not least in a world where the US might be raising rates and sucking dollars back home. But, the Chinese moves are surprisingly being bungled.

The People’s Bank of China has surely spent a long time preparing for this. It has decades of relevant case studies to help it. Not least the fate of Japan since the Plaza Accord of 1985. Why then did it make a step move yesterday, reassure investors that it was a “one-off” and then do the same thing again today?

Note to PBoC: Do it in a single move if you want to prevent speculation, lying to the market like this sends the wrong message and will attract further pressure as speculators bet against you, and – more importantly – businesses try to protect themselves from the risk of further lies.

All that said, the recent moves should be kept in context. True, the move versus of the USD reverses months or years of strengthening. But, check out the CNY versus MYR, KRW, TWD, or many other Asian currencies.

The Fed’s move toward strengthening had fuelled EM FX weakness, the Chinese are responding to that yes, but in a measured way. The bigger picture is a more benign story about them moving towards a dynamic free-floating currency. Could be done better, but good news overall.

Summertime Madness – August Markets (Part 2)

meIn yesterday’s post, we looked at the many reasons why the media has become convinced that financial markets are doomed to suffer severe volatility in August. Peak summertime has often been a month of turmoil and there are some obvious structural reasons for this. And this year, the list of major threats to asset prices is longer than usual.

But rather than assume an outright crash of financial markets, in this post I will argue that the glass is not quite so half-empty as many think. Please note that I am not predicting a strong rally for August, simply suggesting that the picture is more nuanced than fear-mongers suggest. How you position for the month depends on many individual factors, but blindly fleeing to safe havens looks inappropriate.

Let’s go through the key risks one-by-one. Continue reading

August Volatility? Don’t Bet Too Heavily on it

meThe media celebrated the end of July, which was an extremely difficult but ultimately constructive month, with news of impending August doom. Alongside summer trading lulls, journalists and talking heads have found a plethora of reasons for markets to get into trouble. None of us has a crystal ball, but all this fear mongering leads me to expect a rather more positive outcome.

In this first of two posts, we take a look at the known possible causes of summertime madness.

Why Might August Hurt Risk-Oriented Investors? Continue reading