Maraging Partners hear no sound of the Pied Piper's pipe in Q1 2013

Tuesday, 08 January 2013 12:37

Maraging Partners, a Moscow-based currency consultancy, published their market view for Q1 of 2013. The report covers EUR/USD, USD/RUB, and EUR/RUB, and combines fundamental and quantitative approaches. Maraging Partners are bullish on EUR and even more so on the RUB. On the topic of correlations among assets, the report says:

As usual, we have analyzed the inter-market correlations among the futures market instruments that reflect the basic macro factors for Russia: hourly data from the FORTS exchange, such as EUR/USD, USD/RUB, EUR/RUB, Brent oil and Russian stock market. We expected that QE would once again reduce the absolute magnitudes of the correlations. The data have confirmed this expectation.

Note that when strong feelings dominate the markets, correlations among financial instruments, either positive or negative, grow in the absolute magnitude, becoming strongly positive or strongly negative, while the multitude of the financial instruments degenerates, enabling their simplified classification into risk assets and safe haven assets. The very possibility of such classification testifies to the dominance of collective dynamics in these periods: the pack of enchanted rats follow the Pied Piper's pipe, and usually, towards a precipice.  

The investment topic of return to fundamentals -- which, in effect, is what we called the "background process" -- manifests itself as the opposite of the scenario above, and as a result, asset diversification is more effective than usual. The behavior of assets resembles that of cats, each of which walks by themselves, rather than that of enchanted rates. Such was the situation in the fourth quarter, and we expect the exit phase from this regime to last at least another quarter, while the Pied Piper's pipe would be either silent as now or play tunes conducive to investment in risky assets.  

Gruss aus Hameln -- the Pier Piper

The full report is available on the Maraging Partners web site.

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