Investors are bracing for another Lehman style event as the illiquidity of summer trading sessions creates a strong incentive to bid risk aversion assets higher. The Swiss National Bank is acutely aware of these risks as they try and keep the Franc competitive in spite of introducing negative deposit rates and intervening regularly to prevent a rapid appreciation. Traders are paring positions across the board as evidenced by CFTC data from last Friday showing that speculative net positions trended closer to zero across the board. Net shorts in the Euro fell from -138,000 to -89,400 while Yen shorts fell from -116,300 to -80,700. Oil traders also saw both bullish and bearish contract holdings fall while the one notable outperformer which actually saw speculative positions rise was Gold which exhibited a modest increase in net longs from 75,100 to 75,700 in total. Based on the numbers and lacking transaction volume, the old adage “sell in May and go away” is ringing loud and clear amidst the backdrop of weakening fundamentals.
The sideways trend of markets is seeing sophisticated investors increasingly shift funds to cash to have dry powder available for the next round of financial turbulence. The rush to cash might propel the US dollar substantially higher against peers as investors consider the full faith and credit of the American government versus the comparable choices amongst other global institutions. Despite its place in history as the safest asset to store wealth, this might put the dollar at serious odds with precious metals and specifically gold bullion. As the dollar ascends it could conceivably force gold much lower in the event that a trigger catalyzes “flight-to-safety” momentum lower. Estimates below $1100 per troy ounce are not unreasonable in these types of circumstances especially if the acceleration in the dollar is swift. If crossing the $1100 level it paves the way for a move towards $1050 and $950 on the downside. With more and more black swans appearing on the horizon, sooner or later the dominoes are set to tip.
Investors Scrambling for the Exit
Market Trends - 22/06/2015