The Rearview Mirror – September 2016

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The Rearview Mirror
The Rearview Mirror

Christian Zorico (160)

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What about August? Well, we all were waiting for our dreamed holidays and most of us were waiting for some indications coming from the Jackson Hole symposium.

Since 1982  the Federal Reserve Bank of Kansas City has been hosting an annual economic policy meeting at Jackson Lake Lodge. Jackson Hole is famous because of its trout fishing, and this was the artifice to  attract Paul Volcker, who was Chairman of the Federal Reserve and a keen fly-fisherman.

Apparently investors were greedy in fishing for more clarity in Ms Yellen speech. One of the most reported remarks was the following: “Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook”.  By admitting that the economy is frequently buffeted by shocks that aren’t easy to predict and by focusing on unconventional measures still available in case the environment will worsen, Ms Yellen made a great job being a bit hawkish and a bit dovish. Moreover she spent a great part of his speech by remarking the importance of fiscal policy, in a desperate attempt to declare to the world that monetary policies alone can have their positive effects, in some way they can affect and even manipulate assets pricing, but there is a specific need of fiscal intervention in order to boost the economy.

Indeed it is a right conclusion and it leaves rooms to bullish minds because the idea of a fiscal stimulus across the globe (Kuroda and Abe are identified as pioneers in using a combination of these measures) can make the difference in this anaemic environment. On the other hand, I usually read this proposal as a pure invitation to act. Nothing more and Ms Yellen knows that she can do nothing fiscally speaking. This is the caveat. Of course given that markets are based on expectations and we are now approaching US elections, we could argue that a well promising campaign will bolster the confidence. Also to remember is that next French and Germany elections are going to be held between April and October 2017.

Janet Yellen, Chair of the Federal Reserve
Janet Yellen, Chair of the Federal Reserve

In this context, after the Jackson Hole and before the reading of August NFP, Fed funds futures are pricing an implied 60 percent probability of a rate hike by year-end, up from 36 percent at the start of the month. Meanwhile the CBOE Volatility Index remains more than 30 percent below its 10-year average even if it spiked up for the biggest monthly jump in a year at the end of August. However after having reached a record on Aug. 15 closing at 2190.15, the S&P 500 has failed to maintain its momentum amid tepid economic reports and growing concerns about the timing of the next Fed rate increase. It is our aim to read the market in order to get some hints, in a way to understand what is next. In this case a very low volatility could be misunderstood as an excess of complacency and it could be read as a contrarian signal. I often used to play the market as contrarian, but in this circumstance I believe that it is not worth enough being against the market. My advice is to stay away from what is most related to next hike, i.e. Equity and Government yields. Brave heart people could consider the opportunity to trade them in a very short range and with a high level of discipline. If and when a massive equity market correction will occur, I am pretty sure we could have the time to jump in to profit from it, both by shorting the indexes and/or by buying any considerable deeps.

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Ha conseguito il Master of Quantitative Finance and Risk Management (MAFINRISK) presso l’Università Bocconi nel 2005 dopo essersi laureato in Economia degli Intermediari Finanziari presso la stessa Università. Inizialmente ha svolto attività di ricerca e tutoring per i corsi di Portfolio management e Applied Econometrics presso l’Università Bocconi tenuti dal Professor Andrea Beltratti. In seguito ha avuto modo di consolidare le nozioni tecniche ed applicarle sul campo durante l’esperienza come quantitative analyst e risk manager in un Hedge Fund con strategia macro e successivamente ricoprendo la posizione di gestore di portafoglio e fund manager con mandato flessibile per una banca privata svizzera e un gestore di fondi. L’area di interesse è da sempre il mondo fixed-income e azionario, inseriti nel più ampio approccio di analisi top-down.

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