Morning Call: European Markets Trade Higher

Morning Call: European Markets Trade Higher

Europeanmarkets 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 ofthis confidence is due to a better than expected German PPI reading, it came inat 0.1% against the forecast of 0.0%.

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

HedgeFunds Failed to Outpace S&P500

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

The stellarperformance of the equity markets is driven due to several factors such as lessgeopolitical risk in the Middle East, a better than expected earnings start, apositive outcome of the Phase One deal between the US and China. One can saythat investors have loved the low hanging fruit.

BuyInsurance When It is Cheap

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

Gold andIts Resilience

We dobelieve that smart money is supporting the gold price—the ultimate safe havenamong whales. The precious metal is up nearly 2.93% YTD. Earlier this year, onthe 8th of January, the price of gold crossed the level of $1,600against the dollar—the highest level since 2013.  Obviously, the wall of worry is keeping thebulls in-game.  This is despite the factthat we had strong housing and retail data out of the US last week and a potenteconomic docket means that the Federal Reserve may become reluctant to cutinterest rates at the same pace as last year—if any. For a record, the Fedslashed the interest rates by a quarter percentage points three times lastyear. Moreover, the Chinese economic numbers released last week, ahead of theChinese New Year holiday, raised expectations about the progress of thecountry’s economic health. The country has survived the tariff war well and theslowdown which we experienced last year may be behind us. This means someheadwinds 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.


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.