Multi-ASSET Research


Good morning,

last week we saw negative risk appetite in equities as portfolio managers were keen to buy protection in the short term, as US election is seen as the main catalyst that could trigger volatility. The VIX index rose 16.39% weekly, to 22.51. The “fear gauge” rose above its 200SMA and seems ready to test the level reached on the last June in area 26. This short term target could be achieved as the VIX was compressed for several weeks between 11 and 12 and the S&P500 is making lower highs. The S&P500 closed just above its 200SMA, and if the index should rebound on Monday, buying protection through the VIX should became less expensive.  In the FX market the Greenback lost ground against the major group of currencies, with the dollar index DXY down -1.43% weekly. The weakness of the US dollar against Euro, GBP and JPY had not systematic consequences as the gains were made on idiosyncratic factors. EurUsd offered an excellent technical setup for long positions. The British Parliament will need to approve Brexit that it may avoid hard Brexit while in Japan the monetary policy is still disappointing the financial community. A different story however for emerging market currencies, as the US dollar rose across the board. The weakness of the Chinese Yuan, Turkish Lira, Russian Ruble and South African Rand can be explained through a pull/push factor analysis. The FED monetary policy requires a rate hike in emerging market currencies to keep the premium unchanged. At the same time foreign investors demand a geopolitical risk premium on TRY, RUB, and ZAR.  Turkey uncertain future regarding its access to EU, whether as a member or through an agreement similar signed by Norway is adding volatility to the Lira. UsdRub at 63.92 is off its all time high but current price of Crude Oil are not helping the Russian economy. Natural Gas exports are priced through a model linked to Crude Prices, quite different than the Future traded on CME. 

Smart money could stay flat during US elections

Options on VIX with strike price at 15 already made a +300% performance in one week and leverage products like the /ES and /CL were in downtrend after they could not make a breakout of relevant resistances. In case of the S&P500 it could not make a new record high and Crude Oil made a double top.  Bearish downtrend for the FTSE100 in UK and the DAX30 in Germany as well. It is premature to call a bear market of course, but traders that took short positions near relevant key resistances already made a handsome profit that could be wiped out if a sudden reversal it may materialize. That is why smart money could have planned to close their positions, or at least most of them, and

Taking positions just before and during the results could be costly as volatility spikes and sudden stop of liquidity could bring a leverage position in margin call quickly. Brexit dynamics and asset price pattern should offer a lesson regarding the attitude regarding predicting the future.  Only asymmetric trades that offer an interesting reward to risk ration should be taken in consideration.

“Cold shower” trading strategies need attention to details and careful monitoring. If traders are not in their comfort zone is better to wait the development of short term trends or the formations of trading range areas.