Article / 13 September 2016 at 8:00 GMT

From the Floor: 'A very dangerous cocktail'

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From the Floor
By Michael McKenna

Asian stocks were mixed following a strong US outing Monday, but the most telling indicators from the region came on the data front where China posted a string of solid figures that Saxo Bank Global Sales head Christoffer Moltke-Leth says should drastically reduce longstanding fears of a "hard landing" in the Middle Kingdom.

With fixed assets investment, retail sales, and industrial output all exceeding expectations, China appears set to continue its trend of stabilisation. One other notable statistic out of Beijing was power generation growth, which rose to to 7.8% up from 7.2% in the previous month.

Beyond the relative solidity of these data, however, lies the spectacle of the frothy, shadowy, central bank-led global market where the recent (and still shaky on its feet) trend of investors half-expecting policy normalisation from the Federal Reserve was derailed by Boston Fed governor Lael Brainard's dovish comments yesterday.

According to Brainard, "today's new normal counsels prudence in the removal of policy accommodation." The regional Fed chief added that "the case to tighten policy preemptively is less compelling," leading Moltke-Leth to comment that the Fed's overall message has grown "very confusing" of late as multiple speakers make varied and divergent cases for action.

Against this backdrop, it likely comes as no surprise that Saxo Bank head of equities strategy Peter Garnry cautions investors that the market rebound seen in US indices is "no salvation", adding that "we have a very dangerous cocktail in equity markets".

Seems legit (S&P 500 CFD):
S&P 500

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Source: Saxo Bank 

In Garnry's view, Friday's spike, when considered in light of the TED spread (the difference between the interest rates on interbank loans and on short-term US government debt), LIBOR, and continued fragile liquidity, hardly represents a confidence-inducing rally.

In single shares, however, Garnry is bullish on E.ON conventional energy spinoff Uniper, where he is looking to go long this morning with a stop at €9.75 and a take-profit level of €11.50.

"Trading started yesterday with a strong morning session followed by some afternoon retracement – we are betting on a re-price to higher levels," says Garnry.

The greater story behind the somehow untrustworthy stock strength is the correlation breakdown with bonds, which has come to see both assets – traditionally inversely correlated – move in tandem as markets move based on rate hike projections.

On Monday, reports Saxo Bank fixed income trader Michael Boye, European shares tumbled on the US policy normalisation narrative, which was not neutralised until Brainard's mid-morning (New York time) remarks. At the same time, adds Boye, German 10-year bunds sold off with yields reaching their post-Brexit high.

"Bund futures fell by nearly a whole point, and didn't recover until Brainard's speech", says Boye.

Beyond the correlations, the spectacle of a world market whose most fundamental relationships appear to exist at the whim of central bank committee members is perhaps the most troubling aspect of 2016's financial landscape.

After all, the ideal of the free-market system is one in which prices rise and fall based on relationships inherent to their values, trajectories, and the tension between supply and demand.

Had we desired a system in which quasi-state actors could emerge from pillared halls and skew everything by hinting at potential changes to semi-permanent programmes, the second half of the 20th century need not have hosted the conflict it did.

Federal Hall
"Go long equities, short USD, and melt down your pots and pans 
for the Great Five-Year Iron Effort." Photo: iStock

Michael McKenna is an editor at

From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.  


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