Financial integration is on the rise again. From the lowest point of diversification achieved since 2004, financial markets have started to correlate to each other as illustrated by figure 1. It is particularly true in commodities markets where the crash of the oil market (-35% in just three months) spread to other cyclical commodities (iron [...]
The commodities selloff has deepened, putting at risk not only oil but also gold, copper, soybeans and almost all commodities except some base metals (zinc, aluminum). This dynamic has started since August 2014 and oil is the leader of a self-fulfilling negative trend spreading to all commodities and commodity-related assets (currencies, equities of commodities’ producers). [...]
As G10 governments are faced with the need to deleverage their economies, they have no choice but to maintain yields below nominal growths for an extended period of time. This is a state of financial repression in which passive bond holders incur an implicit tax on capital.
In turn, low rates and Central Banks liquidity injections [...]
In a context of vulnerable emerging markets and depressed commodities (figure 1), bonds with high expectations of rates increase offer compelling protections to equities’ selloff. Figure 2 illustrates that US and UK bonds have displayed the most negative correlations to global equities last year. On the contrary, Italian bonds are positively correlated to European equities [...]
Equities long term trends have recently become very different. The gap between buoyant US and Japan, lackluster emerging and bearish Eurozone has never been so wide. As illustrated in figure 1, Japan, US and defensive equities in Europe (Switzerland) are well rated whereas euro zone equities and several key cyclical emerging markets are in sharp [...]
We have advocated risk balanced allocation schemes on several instances since 2013 (here, here, here and there). Guess what? One of the best strategy in the highly volatile month of October (where for instance European stocks tumbled more than 10% intra month and eventually ended the month down 3%) was … a diversified risk balanced [...]
Smart beta investing has gained popularity since the successive financial crises which roiled financial markets. In the wake of severe equities correction, investors looked for alternative methods to capture some equities upside while limiting volatility and drawdown in equities’ downturn. The equities’ investors appeal to smart beta has raised questions on the validity of the [...]
October 21, 2014
Since October, worldwide equities have experienced a severe correction. The peak-to-valley of the MSCI World All Countries in September is close to 10%. The MSCI World All Countries index posted negative returns for the 4th consecutive week in a row since 19th September 2014: -2%, -2%, -2.7%, -0.9%.
The four weeks correction barely reached [...]
Among the signals of the Radar (figure 1), two of them deserve a particular attention:
The short EUR/long USD position, although in a more mature stage, remains attractive because of its low correlation with the other asset classes (close to 0). During the euro financial crisis (2010-2012), the USD/EUR used to be negatively correlated to equities [...]
In September we witnessed a worrisome joint financial triptych (figure 1):
The positive dollar trend vs. every currency (see figure 2). The dollar index is up 3.5% in September with sharp negative performance of commodity currencies (AUD, NZD, CAD). The dollar upside has clearly benefitted Japan but has undermined emerging countries which rely upon cheap dollar [...]