It is widely assumed that the gold price must decline when the Federal Reserve is hiking interest rates. It seems logical enough: gold has no yield, so if competing investment assets such as bonds or savings deposits do offer a yield, gold will presumably be exchanged for those. There is only a slight problem with this idea. The simple assumption “Fed rate hikes equal a falling gold price” is not supported by even a shred of empirical evidence.
"The party's over and bond investors who always tend to be more sober types, realize this and have headed for the exits whereas equity investors are so intoxicated they haven't realized that the music has stopped. Equity investors are still gyrating around the dance floor - just as in 1999 and 2007... I believe the Yellen Fed will soon be treated with the same contempt the Greenspan Fed was in the aftermath of the 2008 financial crisis. And they will deserve it."
After The BOJ And ECB, Will Yellen Disappoint Next? SocGen Warns There Is "Risk The Market Will Be Wrong-Footed"Submitted by Tyler Durden on 12/16/2015 11:42 -0500
According to ScGen, the Fed is widely expected to start tightening policy on Wednesday and adds that "after the BoJ and ECB, we see a risk that the market will be wrong-footed for a third time, and that extreme positions built ahead of tightening will be reversed.... In particular, we are short US small cap equities vs large via being short Russell 2000 vs S&P 500.... As the Fed tightens and the market enters into a lower-liquidity environment (and higher-volatility regime), we think the premium on small caps is no longer justified."
SocGen Looks At The Devastation Across Markets, Sarcastically Concludes It Is "Time For A US Rate Hike"Submitted by Tyler Durden on 12/14/2015 08:53 -0500
"The solution to uncertainty is cheaper valuations. If problems are priced in, investors can afford to look through near terms concerns and focus on the longer term. Worryingly, we have exactly the opposite situation today. Average stock valuations are close to historical highs – so we have lots of risk and little in the way of valuation cushion.... Time for a US rate rise then?"
Global equity markets, as measured by the MSCI Developed World index, are above the lows hit in early October but remain on a downtrend that began after markets peaked at the end of May this year. As SocGen's Andrew Lapthorne notes, the current level is now only just above where the index stood at the beginning of 2013 and less than 1% above the 2007 peak. In other words, as he warns, "the equity market has run out of momentum," and the 'bill' for the debt overhang is coming due.
Over the last few months, in a prime example of currency failure and euro-defenders' narratives, Finland has been sliding deeper into depression. Almost 7 years into the the current global expansion, Finland's GDP is 6pc below its previous peak. As The Telegraph reports, this is a deeper and more protracted slump than the post-Soviet crash of the early 1990s, or the Great Depression of the 1930s. And so, having tried it all, Finnish authorities are preparing to unleash "helicopter money" to save their nation by giving every citizen a tax-free payout of around $900 each month!
Mario Draghi is on deck Thursday morning and market expectations could scarcely be higher. In fact, Draghi is widely expected to execute the Keynesian trifecta, i) a rate cut, ii) expansion of QE, and iii) extension of QE duration. The ECB has indeed gained a reputation for over-delivering, but as SocGen puts it, "with high expectations comes a high risk of disappointment."
"The exception to this global picture is in the US, where sector performance was a Pavlovian response to the much expected upcoming US rate rises (Utilities down and Basic Materials up). Global investors may be cyclically bearish, but US investors appear distracted by the historically cyclically positive message US rate rises might imply. We think this may prove a mistake."
The IMF’s Executive Board decision today means that the yuan will be included in the SDR basket from Oct. 1, 2016, effectively anointing the yuan as a major reserve currency and represents recognition that the yuan’s status is rising along with China’s place in global finance. The weight in the basket will be 10.92%, larger than JPY and GBP. However, as politically-motivated as this decision may have been, now comes the hard part for China.
Wondering where the world's economies are in the leverage cycle? Well, wonder no more. SocGen is out with its updated "leverage clock" which shows you where the bank thinks everyone falls in terms of ticking debt time bombs. As you'll see, SocGen's assessment is quite generous...
November has been a banner month for black swans. From Leftist political coups in Portugal to terror attacks in Paris to downed Russian fighter jets in Syria, the market is gradually learning to expect the unexpected. In its latest Quarterly Economic Outlook, SocGen outlines five political and economic black swans that could land in 2016.
While the world was following the tragic events unfolding on Friday night in France where hundreds of innocent civilians were killed or injured, an important economic development took place at the IMF, whose staff and head Christine Lagarde, officially greenlighted the acceptance of China's currency - the Renminbi, or Yuan - into the IMF's foreign exchange basket, also known as the Special Drawing Rights. Here are the initial early responses by various Wall Street analysts.