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Investors Face Delicate Dance With Hedging Portfolios

Investors Face Delicate Dance With Hedging Portfolios

Monday, 16 May 2016 10:21 AM Current | Bio | Archive

New York Fed President Bill Dudley, who is a voting member at the FOMC and former Goldman Sachs economist, said in an interview the U.S. economy remains “on track” and the Fed raising its benchmark interest rate twice this year is a “reasonable expectation."

Once again, a Fed economist’s view that clearly diverges from how the markets see it and who still expect one rate hike, at best, this year.

Bill Dudley gave also his (interesting) view on negative interest rates, and as the ECB and the Bank of Japan (BOJ) are doing at present saying: “This is not something I’m spending any time thinking about and it’s not something I contemplate doing now or in the future.”

Surprisingly, he will also give an “unscheduled(!)” speech on Thursday about U.S. macroeconomic trends.

Anyway, on Friday we got decent data about total retail sales and spending at restaurants that increased 1.3 percent, against estimates of a 0.8 percent increase, and that was up 3.0 percent year-on-year during April after a 0.3 percent decline in March, which came in unrevised.

Notwithstanding these good data, we got somewhat of a strange behavior in the markets with longer bond yields and U.S. equities falling while the dollar gaining and oil prices confirming their upward momentum with the Brent Crude Oil Front Month trading around its its highest level since November 2015, but which remains nevertheless still about 28 percent below where it traded a year ago.

These moves are, to say it mildly, not evolving in the way they are used too in a logic market, which could mean, there is something illogical brewing and normally that’s not a good omen.

Of course, we’ll have to wait and see if these strange kind of moves continue…

That said, and after we’ll get on Wednesday the minutes from the April’s FOMC that could give us, hopefully, some better insights how the people at the FOMC thought a couple of weeks ago about where the Fed funds rate should be, on Friday we’ll get in Japan another G-7 meeting where “currency policy,” which has of course a direct link to the respective Central Bank’s monetary policies, will be top of the agenda.

We could expect Treasury Secretary Jack Lew telling the Japanese to stop its continuously hinting to depreciate their currency as there is already sufficient strain among the most important currencies of the world at this moment.

As an investor we should not overlook the fact that the U.S. Treasury in its recently released report to Congress about “Foreign Exchange Policies of Major Trading Partners of the United States” put China, Japan, Germany, and Korea on its name-and-shame list because of their material current account surpluses combined with a significant bilateral trade surpluses with the U.S.

To put its simple, and here we don’t talk about Germany or Korea, but if Japan and/or China would really push their currencies aggressively down against the dollar, then we are at serious risk for a new currency war whereby there will be no winners.

At present and with what we know today, I don’t think it won’t come to such a disastrous situation, but if, and that’s still a big if, then gold, and I prefer physical gold above gold on paper for obvious reasons, could be the best hedge against that kind of global turmoil.

As an investor please never forget, when we talk about hedging, that means actively managing your portfolio, and that's easier said than done.

In context of all the above and seeing the volatility and exchange rate of the British pound as of late because of the ongoing uncertainty about the outcome of the UK EU referendum that takes place in about a month, investors whose investments are mainly U.S. dollar based could do well preparing (getting ready) themselves for rising volatility, and if that takes place than we'll have important exchange rates swings of the dollar because of uncertainty that could be on its way because of to the U.S. presidential elections.

Being prepared for the unforeseeable could be not such a bad idea.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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As an investor please never forget, when we talk about hedging, that means actively managing your portfolio, and that's easier said than done.
investor, portfolio, hedging, economy
Monday, 16 May 2016 10:21 AM
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