Talking Points:
• There are dominant fundamental themes in the markets that can overwhelm most other investor concerns
• Yet, where certain conditions, themes or sentiment can dominant markets; they are not always active
• Assumptions like the Dollar being a haven, Peso a US election gauge or Pound a Brexit barometer is too narrow
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There is little doubt that certain conditions, sentiment or fundamental drivers can override all other concerns amongst investors to take control of markets. That said, these deep currents are not always active. Making assumptions that an easy to read fundamental motivation is always dictating the actions of the masses - even when passive - runs the risk of missing the big picture and trade opportunities along the way. Frequently, such assumptions lead to stubborn view on the market that prevent us from adapting to prevailing winds. It has even led to hedge funds closing their doors under the explanation that 'markets no longer make sense'.
First and foremost, it is important to understand that what drives the markets is ultimately the motivation that can sway the majority of its participants. That said, those sparks can be active or cool depending on the circumstances in the global economy and financial system. The most ardent fundamental beliefs are derived from those catalysts that are the most severe or persistent. Those are ultimately also the most dangerous as the lead to the assumption that they are universal and/or permanent. The popular 'safe haven' are amongst the most overestimated assets. The US Dollar, Treasuries and Gold are all presumed to align neatly to the the risk-on/risk-off delineation. Yet, that clear is not the case.
For the Greenback, the role of safe haven is roused in extreme circumstance. Outside a catastrophic sentiment shift, Fed speculation is a more ready-served driver. Though, even that theme is too frequently assigned an influence and steadfastness that is indulgent. Meanwhile, speculation around the stimulus effects of major monetary policy efforts distorts Treasuries and a lack of any yield thwarts gold in their rudimentary roles. Risk isn't the only theme overly relied upon. Yen crosses are treated as one-dimension carry currencies that have a side role as safe currency. The USD/MXN exchange rate has been designated as the US Presidential election guage and trade barometer for US trade. For the Pound, little distracts from a Brexit obsession. We discuss the risks and missed opportunities when we try to reduce markets to unrealistically shallow roles in today's Strategy Video.
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