Monday, 28 May 2018

Beware the summer exuberance of a bear market rally

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My first day back in the markets wasn’t, to be frank, exactly scintillating. Liquidity appears to be poor even by August standards, and I must keep reminding myself the rule is not to take market moves which occur during the dog days of summer too seriously.

Anthony Peters, SwissInvest Strategist

And yet, in the nine trading sessions since July 25, Spanish two-year yields have fallen over 350bp from an intra-day high of 7.14% to close at 3.51% yesterday. Does this kind of move indicate things are good, merely better than they were or simply totally out of control?

What is perhaps most remarkable is that it is exactly one year ago, during the first weekend of August, that we had the most notable of Spanish bond rallies with self-same two-year opening on Friday, August 5 at 4.59% and closing on Monday, August 8 at 3.27%.

That means that, give or take and accounting for intraday volatility, Spanish two-years are, having traded in a range of 2.15% at the lows to 7.15% in the course of twelve months, pretty much where they were a year ago. Just to complete the picture, the 10-year Bonos rallied in that August 2011 move from around 6.25% to around 5% which is a very different kettle of ’orse to the 6.60%-ish area we are in now.

They say that a second marriage is the triumph of hope over experience. There must be something in this bond rally which points in the same direction as the market swings from “They can’t hold it together” to “There’s no way they can let it go”.

The noises coming out of the Troika in Athens point in that general direction as we simply have to acknowledge that, any which way, they will find an excuse to disburse the next tranche of the Greek rescue package. The last thing the global economy and global markets need right now is a hint of a possibility of Greece going to the wall. Its fiscal edifice might be in a persistent vegetative state, but nobody is ready to take the decision to switch off the life support systems. In a strange old way, the Spanish dilemma is possibly the best thing that could have happened to the Hellenes who are well aware that they remain the key stone to the survival of the eurozone.

There must be something in this bond rally which points in the same direction as the market swings from “They can’t hold it together” to “There’s no way they can let it go”

But is all this sufficient reason to rally peripheral markets out of sight? Well, if there is no reason to sell it, you might as well buy it. Equities are following bonds here – of that I have no doubt – and the IBEX put on 297.9 points yesterday alone which represented at 4.41% rally. It, too, has been on the move since Draghi’s Churchillian moment and has recovered more than 18% from its July 24 low.

However – there’s always a however - investors and traders alike should not forget the most basic of rules, one of which is that there is nothing as fierce and also nothing as dangerous as a bear market rally.

Portfolio managers get paid to buy stuff, not to hold cash. When bear markets rally, they find it very hard not to jump on board for the risk of not owning stock when a market might, just might, be turning is greater than their job is worth. Being long in a sell-off is bad luck; being short in a rally is unforgivable.

Being long in a sell-off is bad luck; being short in a rally is unforgivable

We are now in August; no serious strategic decisions are going to be taken anywhere and therefore the easiest is just to follow the market in which ever direction it might happen to be going. Personally, I still believe that we are a long way from the much-vaunted terminal bond market crash which equity geeks are calling for – and have been for the past three years, if it comes to that.

Nevertheless, the VIX index of S&P volatility is still below 16 and hence just over 1-1/2 points north of the post-Lehman low. The US markets might be ploughing a slightly different furrow to the European ones but they still lead the way when it comes to overall direction. US bonds and US equities continue to tell different stories so there is no reason why European ones should not be doing the same.


Meanwhile, poor old Standard Chartered finds itself on the rack. Having avoided the credit crash, the mortgage fiasco and more recently the Libor scandal, it has been held up as best in class. Now the US authorities have thrown money laundering at it – and on a grand scale. I would be foolish to comment on its guilt or innocence, but I am beginning to quietly wonder whether the Federal Office of Management and Budget might not have introduced a column on the income side which is called “Fines from Foreign Companies, mainly British”.

Having had his “boot on the neck of British Petroleum”, the President has also garnered cash from Barclays and GlaxoSmithKline, is about to collect from HSBC and now is after StanChart. Now that’s what I call a painless way to deal with a deficit! Athens, Madrid, are you listening?

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