It’s Always Darkest Before…

We here at BlondeMoney try to neither be optimistic fools nor fatalistic doom-mongers. Either could garner us more headlines but neither is useful in a world of cold-headed investment decisions. You know by now what’s going to cause the next crisis, so how about a dose of good cheer. It’s always darkest before the dawn.

1 Euphoric Equities

The Nasdaq hit a new all-time high and the FANGs are back baby yeah! Here’s the FANG+ index, on which you can trade futures and options, which just about says it all:

The rally was allegedly due to Goldmans upgrading Tech to overweight; we prefer to think of it as Momentum Is The New Safe Haven. So let’s not mistake this euphoria for an all-round “coast is clear” risk-on rally.

2 EM Excited

It will look like that, however, because we are now all so embedded in the game of prices telling us the story. Emerging Markets might just get the buy-the-dip boost they’re looking for, with the astonishing timing that Argentina has been upgraded back into EM status, from mere Frontier, by MSCI. It’s been in the Frontier for almost a decade and despite its recent woes, MSCI still decided to grant it the full-on emerging market accolade. Where it goes from here will be a fascinating test of our hypothesis: inclusion into an index creates a full-on demand for a country’s assets from the passive index-trackers. Will their flows dominate the active discretionary guys who still fear for Argentina’s health?

Even more excitingly for our hypothesis, MSCI have retained the caveat that they can kick Argentina out again:

‘However, in light of the most recent events impacting the country’s foreign exchange situation, MSCI also clarifies that it would review its reclassification decision were the Argentinian authorities to introduce any sort of market accessibility restrictions, such as capital or foreign exchange controls.’

If that were to happen, then the passive outflows would join in with active outflows, creating an automatic increase in selling on assets already under pressure. Just the kind of feedback loop we hypothesize that passive investments embed into the system.

3 ECB Easing

Our favourite Irish farmer-investor, @LorcanRK, flagged up the key points from the ECB officials’ leaked story to Bloomberg yesterday. The ECB “could consider relaxing the rules on buying” for its reinvestments. As they have a 3 month autopilot right now, this means they could pause and build up a warchest of cash before plunging it back into the market. It certainly gives them flexibility to smooth out any wobbles in the market once they pull back from QE proper. And – Draghi must love this – it could be done any time, without a monetary policy meeting. No wonder Mario called this “an important decision… not a marginal one at all“. It’s his get-out-of-jail free card as he goes into his final innings as President. But it also means some permaQE could be a little bit more “perma” than we first thought.

4 Brexit Back In Its Box

These parliamentary votes of the past two weeks were supposed to deliver high drama. Government defeats, battles, bish bash bosh. In the end, neither Brexiteer nor Remainer rebelled, the government persists, and the boil has yet to be lanced. Is it possible now that Theresa, like The Donald, has become an accidental master of three-dimensional political chess? That the UK will end up with the ideal negotiating outcome where nobody is pleased but those displeased are too divided to do anything about it? If so, then market expectations of a muddle through will be the right one.

This chimes in with the general euphoria we have so far described. It’s a funny kind of euphoria; the kind that comes from the absence of dark, rather than the presence of light.

As one of our clients says, it’s always darkest before… it gets really dark.

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