The Holy Grail of traders, investors, and anybody who follows markets is a reliable forward indicator. Imagine it; you find an instrument or data point, whose changes indicate the future direction of the market. Surely, you would be rich beyond your wildest dreams and people would flock from around the world to hear your sage advice!
Sorry, I got carried away there in the pundit’s fantasy, but something, anything that could give you a clue would be welcome, right? There was a time when, while lacking magic qualities, there were a couple of things that savvy traders watched as at least possible forward indicators.
When trouble was brewing, scared global capital would begin to migrate to one, or sometimes both, of two “safe havens.” US Treasuries and Gold were where scared cash hid. The “risk free” status of Treasuries and the “value protecting” properties of gold made them ideal for that purpose. Thus declining yields in US Government debt (indicating rising prices) and a spike in the price of gold would be taken by most traders as an indication that those who control the world’s big money were a little nervous. That in turn suggested that more risky assets, such as stocks, could be in for a rough ride.
Of course, there was never any certainty about this, but I believe that in the last few years both of those indicators have become completely unreliable, for different reasons.
Treasuries have two issues that impact their reliability. Firstly, in order to assess the significance of a move in anything, you must have a base line to start from. Whether you think the Fed’s actions since 2009 are justified or not, you cannot deny one effect of QE…distortion. The presence of a monster that cannot be defeated, gobbling up $85 Billion per month of Government issued and mortgage backed bonds per month cannot help but distort the market in them. Can you tell me, if the Fed weren’t there, where 10 Year yields would be; 3%... 4.5%...6%?
With that uncertainty, it is hard to know what any move tells us, especially given the second consideration; that the aforementioned “risk free” status of Treasuries can now be questioned. The debt ceiling crisis would appear to be over, but there is still a faction in Congress who believes that a failure by the US Government to meet its obligations is no big deal. In fact, some would seem to think it is even desirable. As usual, the debate on this issue has not been resolved, it has been postponed. For now, market reaction has been muted, but any risk to Treasuries reduces their effectiveness as an indicator of fear.
So we are left with gold, but that too has market dynamics that detract from its ability to tell us what is going on. Looking back with 20/20 hindsight, it is obvious that the rise in gold that led to the 2011 high was somewhat bubbly. That bubble burst a couple of years ago, but gold’s inability to break back above the $1400 level would indicate that there is still some air left to be expelled. The technical trap that gold is in makes it, once again, a less reliable indicator than in times gone by.
So, if neither of the old faithfuls can be trusted, is there anything that has emerged as an indicator worth watching? My idea of what that might be assuming that role was prompted by a conversation with an old colleague who is still active in the interbank FX market. He was now on a Dollar Swiss (USD/CHF) desk and mentioned that they had seen a huge increase in trade and order size over the last couple of years. There were, as he put it, “more big boys playing”.
The devaluing effect of continued QE in the US and Japan and continuing problems in the Euro-zone has left capital seeking a new safe parking place. It seems that the staid, boring old Swissy may be it. The last time there was a real fear of a global recession was in the summer of 2011.Take a look at these two charts that cover that time. The top one is the S&P 500 and the bottom is USD/CHF.
As you can see, USD/CHF began to fall before the US stock market, indicating relative CHF strength, and turned around before the S&P. The move down was well underway when uncertainty showed in stocks, so may well be coincidental, but the timing of the turnaround may be interesting.
A few weeks ago, as the prospect of Washington torpedoing the recovery and placing the full faith and credit of the US Government at risk resurfaced, a similar pattern emerged.
Once again, the Swiss strengthened in uncertain times, gaining value before a reaction in the US stock market and also finding a bottom earlier.
Two instances don’t compare to the centuries of past performance that established gold and Treasuries as indicators of global unease, but the ability of USD/CHF moves to foreshadow moves in US equity is, if I can be forgiven for saying this today, spooky! Given the current unreliability of both assets in that role, it may well pay traders and investors looking for a hint to keep an eye on Dollar Swiss in the coming months. Who knows, we may have found the next Holy Grail!