January 20, 2020

Morning Call: European Markets Trade Higher

European markets are seeing a noiseless session due to a public holiday over in the US. This means less trading volume during the European trading session. Nonetheless, traders are feeling positive to kick start the week and some of this confidence is due to a better than expected German PPI reading, it came in at 0.1% against the forecast of 0.0%.

European and US markets are appreciating a positive start in 2020. This optimism has pushed the US stocks to a new record high. The S&P500 index is up 3.06% year-to-date while the NASDAQ index has gained more than 5% YTD. It has outpaced all of the US and European indices. Having said this, the STOXX 600 index also reached a record peak on Friday and it is the DAX index only which hasn’t touched a new high, but it is within a whisker distance of it.

Hedge Funds Failed to Outpace S&P500

More importantly, the S&P500 has performed much better than most of the hedge funds. What we mean by this is if we draw a daily percentage gain ratio of the S&P500 vs Equity Long-Short against hedge funds, it has outperformed by nearly 2 percent.

The stellar performance of the equity markets is driven due to several factors such as less geopolitical risk in the Middle East, a better than expected earnings start, a positive outcome of the Phase One deal between the US and China. One can say that investors have loved the low hanging fruit.

Buy Insurance When It is Cheap

Remember, getting caught off guard is the worst surprise, and therefore we think that it may not be a bad idea to look for an insurance policy when it is very cheap.  The VIX index is selling at a whopping discount of 12.19%, in simple terms, it is down by 12% YTD approximately. The VSTOXX index, the volatility index for the STOXX50, is down by 23% YTD. All of this demonstrates that investors are putting their eggs in one basket which may not be the best strategy.

Gold and Its Resilience

We do believe that smart money is supporting the gold price—the ultimate safe haven among whales. The precious metal is up nearly 2.93% YTD. Earlier this year, on the 8th of January, the price of gold crossed the level of $1,600 against the dollar—the highest level since 2013.  Obviously, the wall of worry is keeping the bulls in-game.  This is despite the fact that we had strong housing and retail data out of the US last week and a potent economic docket means that the Federal Reserve may become reluctant to cut interest rates at the same pace as last year—if any. For a record, the Fed slashed the interest rates by a quarter percentage points three times last year. Moreover, the Chinese economic numbers released last week, ahead of the Chinese New Year holiday, raised expectations about the progress of the country’s economic health. The country has survived the tariff war well and the slowdown which we experienced last year may be behind us. This means some headwinds for the gold price, but again, China is also  a major buyer of physical gold. Thus, improving the economy could boost the physical gold demand.

Economic Data

In terms of economic docket, it is boring, no major economic data is set to be released today which can move the markets. But keep in mind that the most influential and powerful officials have gathered in Davos and any unexpected headline during this event could bring volatile moves in equity and forex markets.