Results for search of category: Eurozone Crisis

Income in Dollars, Please

Generating an adequate income from euro-denominated bonds is next to impossible, so investors should abandon the attempt. They should embrace currency risk – not try to hedge it away. They should enjoy the fact that US dollar yields are structurally higher than those in the Eurozone. This means owning long-dated Treasuries and dollar-denominated EM sovereign bonds. Finally, they should consider the source currency of their equity dividends and take another look at the Energy sector.  [Read More... ]

The Calm Before the Storm

Before the ECB’s announcement today, nothing very important had happened in financial markets for several weeks. We get nervous when it’s this quiet, so we prepared a list of issues to worry about. They range from the benign, like a melt-up in risk assets caused by a sell-off in US Treasuries to the borderline catastrophic, like a Eurozone banking crisis. Our main point is that the current directionless environment is likely to end in the near future. Whether investors believe in any, or all, of the scenarios listed below is up to them.  [Read More... ]

Straws in the Wind

Forecasting with precision all the components of a bear market is very difficult. Observing the increasing number of signals which point in that direction is much easier. These range from US high yield to Eurozone government bonds and US and European equity strategy. It’s not all bad news. There are some positives, such as the potential for a surprise in UK Equities, and a message to buy duration in US Treasuries. However, the overall message from these straws in the wind is very powerful.  [Read More... ]

Eurosceptics may win EU elections

We take recent opinion polls for each political party in each country in the EU and compare them with the share of vote and the number of seats they won in the EU Parliamentary elections in 2014. We conclude there is a good chance that Eurosceptic parties may form the largest single grouping after the elections in May 2019. We believe that this scenario has not even been considered by most investors and that it has significant shock value. Some may even regard it as a black swan.  [Read More... ]

Red Flags

Our recommended underweights for Eurozone Financials and EM Equities are at the sort of levels we saw just before major crises such as 2008 and 2010-12. We think that both can be traced back to tightening financial conditions and restricted dollar liquidity. What concerns us is that neither the Fed and the ECB are prepared to admit there may be a problem or that these two themes could feed off each other. We also worry that further devaluation of the Chinese renminbi could put additional pressure on EM Equities and bring a potential flashpoint closer.  [Read More... ]

International Bears

After last week’s note about excess volatility in the US, we look at the experience of other developed markets in 2000, 2007 and 2015. In a majority of occasions, material increases in excess volatility signalled the onset of a correction and/or the transformation to a full-scale bear market. There are no such signals at the current time, which we regard as comforting, though not conclusive, evidence in favour of our equity overweight.  [Read More... ]

Untangling the Currency Effect

What would happen to investors’ risk appetite if global currency markets stabilised at their current levels? In our view, the cumulative shock from the weak dollar has already reduced the recommended allocation to equities for most developed markets. This includes the US, though not by very much. The only way to avoid further reductions is for the dollar to retrace some its losses. If all major currencies stay where they are, risk appetite in most countries is likely to trend lower. The only significant exception is China.  [Read More... ]

Winter Is Coming

We fully expect a correction in US and global equities at some stage during the Autumn, but unless two or more of our risk-scenarios crystallize at the same time, we don’t think it will be more than 10%. There is too much residual momentum, especially outside the USA, and even after a correction, realised volatility will be below its long-run average.  [Read More... ]


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