Taper tantrum or rate hike tantrum or is it just Deja vue. The fact is no matter what you want to call this, the kind of sell off which we experienced yesterday, and the one which we are going to have in the coming days about the US interest rate hike, is no longer a new phenomena. As an investor, if you were not positioned for this, then obviously this is a lesson for you that nothing is forever.
The euro is on a constant downward slide against the dollar and traders are blaming this mainly on the dollar strength. Well you cannot ignore the fact that it is certainly true, the most easy trade since the federal reserve announced tapering is buy the US dollar, and now given that we are not far from the day when Yellen will announce that the Fed are confident to hike the interest rate, it may make the current dollar trend even more steeper. However, it will be foolish to neglect that how much of that news is already baked in and the chances of disappointment are much higher if you are a dollar bull.
When you look at the month of March it looks so much similar to January, history does repeat itself! The sell off for the equity market is very intense, as traders are worried about numbers of elements, but none of them are any new, just the old ones, which like to resurface from time to time.
Firstly, it is Greece, which says one thing and does something else. The finance minister is really playing an extremely dangerous game and stretching the patience of its creditors. You can only go so far with this behaviour, especially when you are dealing with Germans. The recent video of the Greek finance minister during which he said that the country is almost bankrupt to pay its debt without any hair cut could just fuel the fire. The fact is that now the situation is not the very same as it was back in 2011, and yes, theoretically, kicking Greece out is not going to be a real big mess as compared to 2011.
Greeks are using their leverage to maximum that they will not be thrown out of the EZ and my concern is, this thinking is just getting way too much stretched. Whatever they need to do, the creditors do want to see a real progress on their end and mocking of the agreed reforms can have a serious consequences.
If the situation does gets out of hand, the real good friend during the time of uncertainty could be the old yellow shinning metal, which has been under tremendous punishment due to the very same fear which we faced during the taper tantrum. Gold could move sharply up if the situation in the EZ starts to unfold with not so much pleasant results.
The second piece of the puzzle which has started to hunt the market is the negative yield on government bonds in the EZ and the condition (the ECB will not buy the bonds of the countries if their yield extends any further lower than -2%) which the ECB announced when they unleashed the QE. So in short, how the ECB QE will fully work in the eurozone is becoming a concern for the investors.
Finally, it is the dollar strength, and if the markets are really ready for the interest rate hike. The reality is that the market will never be fully ready for hike in the interest rate, because it is an addiction of cheap money, which investors are used to, and they are not going to be happy if you pull that plug. So in short, Miss Yellen will just have to be strong armed and pull the plug, just like she did with her tapering decision. And we think that the federal reserve bank is going to follow the strategies of the tapering time very closely. The Fed will increase the interest rate and the hike will be very gradual just like the tapering.