Picking Up Pennies In Front of a Steamroller and FOMC, BoE, BoJ Ahead
- Risk exposure across the market is more than complacent - it is willfully reckless
- Though volatility measures are high, reactionary markets will be the norm given a fundamental focus on trade disputes
- Top event risk from the FOMC, BoE and BoJ rate decisions to NFPs to Mexico's GDP will not easily motivate the markets
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
Complacency isn't the proper word for the general course the investment community finds itself on. Reckless is. The reach for yield is not a new phenomenon for the the market. We have seen the cost of entry into assets outstrip economic fundamentals, rates of return and forecasts for the future for years. Yet, that shouldn't desensitize us to the risk that such exposure to 'risk' represents. It isn't the record high on the S&P 500 that should concern, but the leverage behind the market. VIX at a two-and-a-half year low looks far more sinister when we appreciate the appetite for leveraged ETFs or the record short position in the volatility index's futures contracts. Even the rise in the more risky assets (Emerging Market and High-Yield ETFs) isn't dangerous until we consider its progress comes against exponentially greater threats like the breakdown of trade relations.
The balance of the fundamental opportunity in the financial system is severely skewed. Building on a risk-oriented position is an extraordinary threat and will yield very little return for the exposure taken. Alternatively, the seemingly impossible turn in sentiment can devastate some an ill-prepared market. This should not keep us from actively trading in the markets, but it demands we be more circumspect of what we are getting into. Is the strategy, size, duration, exit plan and other important aspects of a trade intend to execute fully accounted for? What happens to this position if sentiment were to suddenly reverse course? These are questions that should be considered with all new trades placed going forward.
With a difficult trading environment to work with, the week ahead should look more risky than opportunistic. We have a laundry list of critical, scheduled event risk but a warped fixation on what can truly drive the market. The FOMC rate decision and January nonfarm payrolls (NFPs) are great catalysts for rate speculation - the central bank is very unlikely to lift at this meeting, so speculation over subsequent gatherings is its primary use. However, the yield advantage the Dollar has rallied on over the past few years has taken a backseat to concerns over the United States' trade policies with the new President. Similarly, the Bank of England rate decision could pull the Pound back up from a dovish setting, but Brexit is the focus for the UK currency. What do the markets imply versus what will they actually offer traders in the weeks ahead? That is the focus of this weekend's Trading Video.
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