Gold, Crude, Euro and the US Dollar

For Professional Clients Only. For Information Purposes Only. Not Investment Advice.

Good Afternoon, when we put out our note on Crude earlier today which flagged a break of 98.25 as leading to a potentially quick drop to 95 (and then possibly 90), we didn't reckon on it happening 30 minutes later! Still, we now have January WTI last at 95.77, so break-out traders would have shorted Crude on the recommendation, WTI is down over US$4 so far today and still looking pretty grim. We still have a feeling for lower WTI, and as our general and long-held view is for a strong USD (DXY), that should exacerbate the risk of further WTI/Brent weakness. On the other key instruments, most readers will know we have been looking for lower Gold prices before getting involved and we have seen sharp drops in both Gold (down US$50 today) and Silver (down almost $2), but possibly there is more to go as Central Banks and other forced sellers take profits wherever they lie. A strong USD also acts as a drag on these prices and other USD-denominated commodities. Policy error risk still runs high and so we will take a small Gold weighting at some point, but not just yet. For anyone that has followed our call on GBP/EUR, today is a good day but it's been a steep rise in a short space of time so we would suggest trimming the positions and taking some profits. GBP/EUR last at 1.1930, up 3 big figures in just a couple of weeks.

Some quick pre-Turkey comments...

For Professional Investors Only. For Information Purposes Only. Not Investment Advice. Please see Disclaimer.

Happy Thanksgiving to those that celebrate it, and happy 'half-days' of trading for the rest of us....

Onto the markets, just a quick note to set out our views on a few key instruments. In our view, Gold and Silver seem likely to continue their pullback, with Gold possibly heading for c.1620, and further down to nearer 1500 before levelling off. As readers may note, it is these levels that may start to make us interested. Silver may still test nearer 25. The USD Index (DXY) is likely to represent a safety zone for some time and we expect that it could reach 90 over the next 12-18 months. We remain bullish on GBP vs EUR but having taken our profit some time back at 1.17, we are intending to gradually re-build our position on pullbacks, which could take us to as low as 1.13. We have raised our concerns on the major equity indices in previous letters, and the current action continues to bear this out as being a prudent path. We are still negative on banks and also miners, with some rare exceptions. Some of the low beta sectors are of more interest and as we expect 2012 to be a very messy year, we are not intending to deploy a lot of cash at these levels, instead choosing to stay liquid, picking off opportunities if and when they present themselves. We are closely watching the commodity space, Natural Gas, Wheat and Sugar in particular and are currently treating these tactically as the cross-winds of the MF Global position unwind and the USD strength have injected some considerable volatility. At some point we may establish some medium term long positions but for now we are tackling these both ways.

Meenaz P Mehta
Chief Investment Officer
Axis Investment Management

Tempted to Pick Up Equities Outright?

For Professional Investors Only. For Information Purposes Only. Not Investment Advice.

Good Morning,

As we had hoped, GBP/EUR and the DXY continue on their upward trajectory although in these times where profits are harder to come by, I wouldn't blame you for booking some winnings at these levels, we are 5 big figures to the good on GBP/EUR, pullbacks at any point are possible. Volatility is also at heightened levels, so those of you that considered our suggestion several days ago to invest in some portfolio protection should see those positions contributing nicely to overall p/l and dulling the pain somewhat.

From here on, with equity indices on the cusp of rolling over, we cannot yet bring ourselves to come off the sidelines and invest outright. We have our yielding positions that are hedged off and don't plan to change that just yet. Staples and Pharma seem to represent long term value but there doesn't seem to be a great rush to commit cash right now.  The 'major' Investment Banks are starting to price a recession into their DM and EM numbers at last although they are still far too optimistic (or biased depending on your viewpoint). 

It is time that has to play out now before entry levels come to light, rather than price. Hopefully patience will pay off. Capital preservation and a high level of market neutrality in the interim is paramount.

More to go on GBP/EUR and DXY, fading Gold and Silver....

For Professional Clients Only. Not Investment advice. For Information purposes only.

To recap before the weekend, we maintain our view that GBP should appreciate further against EUR, that the DXY (the US Dollar) should appreciate long term and that the heightened volatility in Gold and Silver, whilst denting their attractiveness as safe havens, should give rise to some interesting entry points lower down. As we have alluded to earlier, with the increased geo-political risks and no shortage of 'policy error' risk, we are still inclined to have a weighting in Gold and Silver, but haven't yet seen the levels we're after.

Have a good weekend!

A Quick Look at Silver

For Professional Clients Only. Not Investment Advice. For Information Purposes Only.

Good Morning, from a quick look at the charts, the next level of any real significance is c.22. That is a support level extrapolated from around 7 years of data back to 2003/4. Looking back even longer, given the many years that Silver spent priced at less than 10, the very long term support line and trend
line would give a support around 15. The last breakdown in Silver in 2008 resulted in a 50% retracement (peak to trough from ~20 to ~10), we've almost hit that sort of retracement already (48 high, low recently was 26). Leaving aside the possibility of a knee-jerk move back up to over 30, I think if you
were looking to average or get involved, it may be best to have keep some of your bullets back for later use in case we do see these lower levels. Any Twitter or Blog fans will already know we are watching for c.1500 on Gold before we examine it further, we pretty much got there in one session! The increase in margin requirements by the CME will have hastened this correction along as well.
Thanks, Meenaz

Not too late for Portfolio Protection

For Professional Clients only. For Information Purposes Only. Not Investment Advice.

Following on from the post of a couple of days ago, for those of you that felt some downside protection was worth having will be feeling better that those who didn't given the market drop yesterday. Similarly, it seems to have paid off to consider the US Dollar (and the DXY) as a probable recipient for the panic-stricken cash.

Should we re-visit 2008 lows or even approach them, no equity sectors will remain untouched. In the two prior bear legs, even consumer staples, utilities, health care and telcos lost significant value. So, don't think that just hiding away in 'defensives' will protect you, losing less is still losing. When equity indices go down, all equities go down with very rare exceptions. With the US veto of the Palestine statehood bid at the UN seeming likely, we would expect geo-political tension to only increase and the risk of unrest also to increase. So, that leaves us as general buyers of Gold, mindful that the next support is c.1675, with major support and buying levels of interest around 1500. We are also buyers of the DXY with a longer term view.

The 'defensive' equity holdings referenced above are useful places to be invested given their income-producing characteristics, however depending on your own requirements, we would suggest that you examine the merits for your circumstances in hedging off the index downside in some way. As you know, we certainly do. We are also cautious of any highly performing assets which would be vulnerable to profit-taking in the event of sovereign-level margin calls and cash raising measures.

Furthermore, there seems to be no rush to jump naked into these sectors given the shabby near term outlook for the G7 main indices, so by all means drip-feed. Our corporate bond duration remains relatively short, approximately 2 years. Strategically, we remain general sellers of EUR vs GBP but there seems to be no rush on the entry levels given the swings which we see set to continue for a while yet.

Where to find shelter in an ex-growth world

For Professional Investors Only. For Information Purposes Only. Not Investment Advice.

We suspect that stock market index performance worldwide will not be paticularly remarkable for at least the next 12 months and possibly longer, so whilst there may be merit in picking off some value names for the long run, equivalently, there are plenty of value traps where stocks are cheap for the right reasons and are likely to stay cheap for some time to come. Whilst there may still be a seasonal rally of some sorts between now and year-end, I don't feel sufficiently confident to return to miners, banks and other such high beta sectors. Instead, for the time being, we are concentrating on yielding investments in secure sectors where the dividends are covered and the growth trajectory is fairly visible, with market neutrality in most cases. As the downside risk to stock indices and global economic growth is so palpable, there may be merit in evaluating if some portfolio protection via options, futures or volatilty instruments has a place in your portfolio - subject your own risk profiles and tolerances. Our duration on the bond side is well under 3 years by which time we anticipate that the interest rate environment will have normalised. We are also looking to take tactical positions on Natural Gas, Wheat, the Dollar Index and EUR/GBP.