Bedrock’s Newsletter for Friday 7th of September, 2018
7 September 2018


 Friday, 7th of September 2018

It is Friday ahead of Rosh Hashana, the Jewish New Year. A good time to wish you all a happy New Year! We find ourselves under troubled skies full of thunder and lightning, primarily of the emerging-markets type… Let’s hope that by Monday the fresh year will fix things…


Turkey with its currency storm, Venezuela’s disintegration followed by the unrelated breakdown in Argentinian economics. Ouch… The Emerging-Market rout is the longest since 2008 as confidence cracks. For stocks, it’s 222 days. For currencies, 155 days. For foreign-currency bonds, 240 days. This year’s rout in emerging markets has lasted so long that it’s taken even the most ardent bears by surprise. None of the seven biggest sell-offs since the financial crisis — including the so-called taper tantrum — has inflicted such pain for so long on the developing world (Source: Bloomberg). The scope of the slide, as measured in the number of days from peak to trough, is pushing some strategists to say the slump is more than just a knee-jerk reaction to higher U.S. interest rates or the unfolding trade war. It’s become a full-fledged crisis of confidence for investors in developing nations. While traders typically focus on how much they lose in terms of percentage change, that yields only a limited perspective on factors driving the markets — or the potential for recovery. Short, intense sell-offs often lead to short, intense rebounds, lulling investors into a false sense of resilience. That’s what happened repeatedly in 2016 and 2017. But looking at how long a decline lasts, not just how deep it is, can better expose the fault lines. Lingering downtrends upend futures and options contracts, forcing traders to take losses. They also lock up investors’ collateral in the form of enhanced margin calls, leaving them little room to make other trading decisions. A longer selloff also means the argument for buying the dip — one frequently made by money managers earlier this year — gives way to cautions over avoiding a falling knife. And that, in turn, can persuade money managers who treat emerging markets as one homogeneous group to sell weak and strong markets in tandem, no matter their specific fundamentals. It’s the very definition of contagion. The difference this time (there you have it again- it’s “different this time?!?”) is the absence of even temporary resilience. It’s become a contest between the dollar and everything else denominated in the U.S. currency. That helps explain why there’s been simultaneous selling in a haven asset such as gold and riskier emerging-market assets. First came the Argentine selloff. Then Turkey. And before long, assets from South Africa to Brazil and Indonesia were getting hit in a selling stampede across emerging markets.


It’s a phenomenon that has a cadre of investors and strategists from JP Morgan Chase & Co. to BlackRock Inc. reaching for a single word: contagion. The argument goes like this: while the asset class may offer value over the long haul, investors will sell relatively safe holdings to cover losses in more vulnerable markets or, worse, treat all emerging markets the same and sell indiscriminately. A herd mentality has taken over, meaning no matter what the relative risks and potential returns are in individual countries, investors who choose to buy, run the risk of being trampled. “We are having a confidence crisis in emerging markets, with some level of contagion being present,” said Pablo Goldberg, a money manager at BlackRock Inc. in New York. “With the short-term currency moves, it’s hard to jump in.” Developing-nation currencies have slid to their weakest levels since May 2017, with the Argentine peso, Turkish lira and Indian rupee among those sinking to unprecedented lows in recent days, reinforcing the view that these aren’t merely idiosyncratic episodes. Indonesia’s Rupiah hit its weakest since the Asian financial crisis two decades ago.


All this is in lands far away, affecting only the fringes of our world’s portfolios. Or should we be worried about a spill-over into our environment? Well, if not outright worried we should definitively be vigilant- JP Morgan’s top quant warns that the next crisis to have flash crashes and social unrest not seen in 50 years. Sudden, severe stock sell-offs sparked by lightning-fast machines. Unprecedented actions by central banks to shore up asset prices. Social unrest not seen in the U.S. in half a century. That’s how J.P. Morgan Chase’s head quant, Marko Kolanovic, envisions the next financial crisis. The forces that have transformed markets in the last decade, namely the rise of computerized trading and passive investing, are setting up conditions for potentially violent moves once the current bull market ends, according to a report from Kolanovic sent to the bank’s clients on Tuesday. His note is part of a 168-page mega-report, written for the 10th anniversary of the 2008 financial crisis, with perspectives from 48 of the bank’s analysts and economists. Kolanovic, a 43-year-old analyst with a Ph.D. in theoretical physics, has risen in prominence for explaining, and occasionally predicting, how the new, algorithm-dominated stock market will behave. The current bull rally, the longest in modern history by some measures, has been characterized by extended periods of calm punctuated with spasms of selling known as flash crashes. Recent examples include a nearly 1,600-point intraday drop in February and a 1,100-point decline in August 2015. Please, read this less as a prediction and more as a warning…


Can we call it contagion? The tech sector has been punished this first week of September. FANG shares tumbling as executives of the tech heavyweights faced scrutiny on Capitol Hill. The selloff in emerging market assets deepened, adding to the risk-off tone on global financial markets. And this just after Amazon [AMZN] crossed the $1 Trillion market cap, joining Apple [AAPL] in that exclusive club of two, oops, one… While the world’s largest cryptocurrency is down about 65% since its peak in December, technical indicators suggest there’s worse to come. Bitcoin has consistently had lower peaks since its apex in December, with each new high lower than the last. In addition, the Directional Movement Index signals the bullish buying pressure ended abruptly, and a new selling pressure trend has started. Goldman Sachs Group Inc. is pulling back on near-term plans to set up a crypto trading desk, according to reports. Crypto hedge funds are down by nearly 50% so far this year, according to the Eurekahedge Crypto-Currency Hedge Fund Index. Is it the end-of-the-world coming upon us? We like to doubt that, even as the VIX (fear index) has risen to almost 15, it still is quite low. Gold has risen some, but is still at just $1’200/Oz. The US Dollar? The ultimate escape venue from most troubles is actually down some, with the DXY Dollar index at 94.875 down fractionally from its 2018 high of 96.55 in mid-August. We are seeing some of the last Q2 reports coming-in, mostly supportive of the pre-September optimism. Should we just tighten our seat-belts and expect the ride to continue in its previous direction, if “bumpier”? we’d like to think so but have a caveat to this hope- “One cautionary sign for U.S. stocks is that corporate insiders have accelerated their selling of U.S. equities,” said Winston Chua, an analyst at TrimTabs. “They’ve dedicated record amounts of shareholder money to buybacks but aren’t doing the same with their own which suggests that companies aren’t buying stocks because they’re cheap.” Executives sold more than $10 billion worth of their stock holdings in August. That’s the most since November.


We are still befuddled by the US$ weakness… Maybe the market’s thinking is that the Fed won’t be raising rates so soon? Or, are we now expecting the US Trade Deficit to widen as the economy keeps growing, adding imports faster than exports (and this, in spite of Trumps ‘Amazing’ and ‘Incredible’ new trade deals)? Whatever the real cause, we suffer from the Dollar’s inability to rise towards our expected DXY of 100… But no matter the reality of the day, we strongly advise substantial US$ holdings as we face increased risks of global conflicts. If and when things were to turn ‘badder’, the Dollar will likely be a valid hedge…


Hoping that September’s start isn’t leading to an October as we have seen in the past. “Experience is one thing you can’t get for nothing”. Oscar Wilde.



Market Weekly Highlights

Currencies & Commodities

  • The greenback is flat since the start of this month and acts as none of the NAFTA negotiations or China continued trade disputes matters. The Dollar Index DXY which reached almost 97 in mid-August is trading back down at around 94.90 ahead of August Non-farm Payrolls and US average weekly earnings later today.
  • The EURUSD pair is trading flat for the week at around 1.1646 with limited upside, unless the US Jobs Report disappoints.
  • The CHF is the currency that has strengthened the most this week with the CHFUSD pair at 0.9650 and EURCHF at 1.1240 this morning.
  • The Pound edged higher this week reaching 1.2942 from 1.2660 seen in the middle of the last month, but well below the 1.4375 top seen early this year in April.
  • The JPY is flat this week, trading at 110.82 this morning, on the back of trade wars and also safe haven bids fuelled by the Turkey-led sell-off.
  • In EM, both the Russian Ruble and Turkish lira are suffering amid US sanctions for the former and economic crisis and political turmoil for the latter. The Russian Ruble is trading at around 68, while the Turkish Lira which reached 7.23 in early August, is now at around 6.47.
  • The Brazilian Real is slightly higher for the week, now at 4.05, amid lower appetite for emerging market currencies sparked by trade-war fears and rising US interest rates.
  • Bitcoin which nearly hit 8’500, jumping 20% from the lows, is now down again at 6’440.
  • Crude oil WTI is down this week to $67.75 per barrel, amid latest US oil inventories data, continuous Trade War escalation and mounting pressures from US sanctions on Iranian Oil; Brent is trading at about $76.36.

Fixed Income

  • 10Y U.S. Treasuries yields, which had traded in a range during the last quarter of 2017 from 2.30% to 2.40%, now trades at about 2.88%, quite stable.
  • The Japanese 10-year JGB yield has traded in a range from 0.020% to 0.060% for the past 6 months, actually trades back at 0.11% February levels.
  • In Europe, the German Bund yield nearly doubled at one point this year, jumping from 0.40% to 0.80%, but then came back down as low as 0.20% on the back of Italian crisis fears. Now back again towards 0.36%. The same for the French 10Y Yield which had crossed the 1% during February and is now back to almost 0.70%.
  • In Peripheral Europe, Italian 10Y yields traded again just above 3.25% from the 2.50% support found during July climbing towards the 3.50% reached in May, amid internal political turmoil; now showing 3%. The Spanish 10Y yields trades some 150 bps lower than Italy at 1.44% down from where it started the year at 1.61%.


  • Markets in the US are down since last Friday but remain positive for the Year 2018 with NASDAQ being the strongest performer and posting 14.77% positive yearly return. SP500 and DJ are up, respectively by +7.65% and +5.16% yearly returns. The SP500 is actually at just below 2’880, the DJIA just a couple of points below 26’000, while Nasdaq is trading some points above 7’920.
  • In Europe, markets are down for the week and showing negative returns for the year so far for all major markets, the CAC 40 being the last one turning negative this week, with yearly performance of -1.43%. The Eurostoxx50, DAX, Spanish IBEX 35 and Swiss SMI are all down by -6.16%, -7.54%, -8.57% and -5.87%.
  • In Asia, the Nikkei has turned negative for the year so far marking -2.01%, while Hang Seng is down by almost 10%. BOVESPA is flat for the year again helped somehow by the lower BRL but still having lost as much as 6.5% from the highs this month.


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