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Fundamental Winds like Risk Trends and Rates Shift but Don't Die

Fundamental Winds like Risk Trends and Rates Shift but Don't Die

2017-01-11 03:57:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Risk trends is an elemental aspect to the markets that may lose drive but never truly 'breaks'
  • For benchmarks like the Dollar, S&P 500 and Yen crosses; temporary dalliances should be appreciated as such
  • Currently, universal sentiment trends, relative monetary policy and rising trade boundaries are key themes

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

'The Dollar isn't a safe haven anymore.' This is a statement that comes up rather often in market conversations nowadays. It is very similar to other, systemic observations that have been made recently - and have been uttered across decades. In previous cycles, monetary policy has risen and fallen as a key drive, regulations had redefined the landscape and even basic economic health measures have launched speculative runs. In reality, many of these drivers are foundational in nature such that they always carry weight in the pricing of financial and physical assets. However, their primacy as fundamental drivers is not constant. Circumstance changes and so does the focus of the world's investors.

In a strong and high-yield global economy, investors are naturally inclined to follow the competitive returns, economic paths that project greater yield and regulations that promise to expand options. In contrast, for panic-ridden markets, little else matters beyond seeking shelter. That is perhaps the environment when 'risk trends' are absolute for control over investment decisions. For the current, low-yield and high-risk world - dichotomous compared to most historical norms - we have yet another reality. Appetite for yield wins out for both the S&P 500 and Dollar, but caution overrides conviction with threats to globalization leveraging pressure on the unorthodox reality.

Looking across a world of possibly fundamental paths the world and its markets may take (and there are many), it is important to recognize that many of the themes are perpetual and will return to prominence when the proper thresholds are correct. Monetary policy is still leading the way with performance like that championed by the Dollar as inflation expectations rise behind the Fed's second rate hike this past December. Yet, the potential for a reversion to what many presume is a defunct risk trend is exceptional high. A passive chase of slightly higher returns won't return this theme to prominence, but a plunge into fear would quickly remind traders as to the permanence of sentiment with Dollar, S&P 500 and most other assets reverting to their elemental forms. We revisit the importance of appreciating the flexibility of crucial market themes in today's Strategy Video.

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