It was enough for Mom (ECB) to let her children (markets) understand that the time to start walking with their legs is approaching (see the newsletter published on Saturday 7 June) to trigger a panic (and whims).
At the end of last week, first Christine Lagarde, president of the ECB, then Jerome Powell, president of the Federal Reserve, had given reassurance on the generation of the necessary liquidity flow at this stage but had also said that a flood was not to be expected and that, in perspective not too far away, the markets, should have prepared themselves. The result, this week, was a retreat, first slowly then gradually broken and noisy. If everything ended today, the retreat could be dismissed as a healthy reversal after a little justified euphoria, but it is not said.
Simplify 02, however, had already repositioned the portfolio into very conservative assets after having exploited the post lockdown rally as much as possible: therefore, no damage from the vagaries of these days, and volatility has been effectively contained. We are therefore satisfied with the work done, above all because we have respected our mandate: first of all, to preserve capital.
The signs for the future are mixed. On the positive side, the usual messengers of the increased risk aversion (dollar and gold) did not move much between Wednesday and Friday. On the other hand, by moving the analysis in a more quantitative direction, the forward curve of the volatility index (VIX) is inverted, signalling a higher expectation of short-term volatility. This inversion usually does not signal the relaxation of market trends.
Before putting your foot back on the metal, it will, in any case, be appropriate to read the political and economic developments carefully. The American elections are approaching (November) and the Republicans seem to have lost momentum in the past few weeks, mainly due to how the crisis has been managed and the consequent social impact. A strengthening of the democratic party is rarely bullish for the markets, but we are still about to enter a part of the year in which, usually, the attitude of investors is positively sloped.
Finally, the correlation between the various asset classes is currently high. Well aware that correlation does not imply causation, we observe that the movement of asset classes, historically little correlated, is in this period: it means that the expectations of a change in liquidity on the markets today prevail over the actual discounting of the future cash flows of the individual companies.