18 Feb 2011 | 14:29
Categories: Economics / Markets
Hugh Hendry, manager of the Eclectica fund, explains why central banks' inaction on interest rates has led markets to take matters into their own hands.
The market has become emphatic. We are in the midst of an orthodox, read strong, economic recovery and monetary policy is deemed too loose.
Not willing to wait for official rate hikes, the money markets have taken matters into their own hands: a hawkish series of rate increases has been priced into forward curves.
We are now very close to the rate pricing environment of 2004/07 when the global economy enjoyed almost unprecedented strong synchronized growth. The message from the fixed income desk is clear: we are preparing for a global boom.
We, of course, dissent. I will reiterate our objections in a moment. But for January our rate book lost a further 134bp. At this rate of hawkishness we will have no rate risk by March. This loss was mitigated by a 95bp gain from Japanese CDS protection and a 38bp gain from our modest and agricultural facing equity book.
Gold option premium cost 8bp and a rally in the euro cost a further 48bp. Net, the fund lost 1% for the month. We are bearish and the market is bullish. Our risk book is correspondingly small. But have no doubt that we have a strategy for making money this year.
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