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Is Risk Appetite Returning to the Markets?
Since last Thursday, carry trades have performed very well. USD/JPY
has risen over 250 pips and the Dow appears to be carving out a near
term bottom. This has led some investors to wonder whether whether risk
appetite has returned. The stock and credit markets have been stabilizing over the past few
months and thankfully, no bank has fallen victim to the same type of
demise as Bear Stearns. According to an article in the Wall Street Journal
today, “a growing number of economists — including some who not long
ago were saying a recession was all but inevitable” are now taking a
detour. The 325bp of easing delivered by the Federal Reserve and the
distribution of fiscal stimulus checks has forced many economists to
reduce their odds of a recession. Wachovia for example revised their
probability of a recession from 90 percen in April to 45 percent.
Economic data has been stabilizing and we also see the market’s
improving risk appetite reflected in the Treasury markets and the CBOE
Volatility Index. The VIX, which measures the volatility in the stock market has hit
the lowest level since October indicating that market jitters are
subsiding:
Source: Bloomberg There has also been a surge in US Treasury yields. Looking at the
details of the 10 Year US Treasury yield, we see that the gap between
the real yield and the inflation premium has contracted significantly
from its March post Bear Stearns’ highs. Be Cautious Even though risk appetite has improved, be careful of a burst in
volatility because whenever volatility in indices such as the VIX hits
extreme levels, a reversion to the mean may be right around the corner.
by Kathy Lien (Kathy Lien) Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital. |
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