What started off in familiar fashion, with Asian stocks rising, and Europe hitting multi-month highs and US futures in record territory has stumbled in recent minutes following a continued rush for safety in short-dated German Bunds (the 2Y is now trading at -0.92%) and ongoing selling in the USDJPY, which has pushed Stoxx 600 back to unchanged, and S&P futures to modestly red for the session.
Prem Watsa, the CEO of Fairfax Financial, and largely recognized as Canada’s most famous investor, is dropping his bearish stance on the markets. Watsa announced that he is covering his firm’s equity hedges after suffering a $1.1 billion net loss on its investments in Q4, and an even bigger loss for all of 2016.
S&P equity futures followed Asian and European stocks lower, driven by weakness in Franch and Italian markets, as French political concerns returned; the pound tumbled after UK monthly retail sales unexpectedly dropped pushing the dollar higher and Euro lower.
Whether it is due to overnight news that much of the recent rally may have been due to one specific fund's cover of a synthetic "short SPY" trade, or just because algo traders have gotten a case of overbought robotic vertigo, S&P futures dropped 0.2% in early Thursday trading as risk appetite fizzled and European shares dropped on concern the longest rally since July 2015 went too far, while the yen, bonds and gold advanced as the dollar fell.
The global "risk on" melt-up continues. After a modestly hawkish Yellen warned that every meeting is live, and refused to take March off the table, sending the dollar and yield higher and the S&P to fresh record highs, world stocks rose hitting a 21-month high on Wednesday with the dollar rising for the 11th straight day, the longest positive streak since July 2015.
European, Asian stocks declined, halting a global rally that sent U.S. stocks surging to new all time highs faltered, weighing on the S&P although the index rebounded modestly after a kneejerk announcement lower overnight after Trump's National Security Advisor announced his unexpected resignation.
Whether it was long Russell 2000 futures, short bonds, long US dollar or short gold, most market participants are busy extrapolating the violent market moves months into the future. You're deemed an idiot if you don’t buy into the “Trump will fix everything” mantra...
Since President Trump's election, Small Cap Russell 2000 stocks have outperformed (almost double the S&P 500). However, those gains have come at a cost - the price to protect against Small Cap stock losses relative to S&P 500 stocks is near its highest since 2006.
Faced with a Tweeter-in-chief, how are investors to navigate what’s ahead? Is there a strategy behind President Trump’s outbursts; and if so, how shall investors position themselves to protect their portfolios or profit from it?
"Trump is a boost to volatility traders because of his inherent unpredictability... stop underestimating this man... All bets are off, and that is very good for volatility… but potentially very turbulent for the world."
"The only question that really matters in this business is this: What’s the next big move? It’s probably a continuation of the Trump trade"... But "the thing is, consensus trades have a nasty habit of working, just not exactly when you want them to"