Gold rally accelerates, Europe needs stabilising, ASX futures down 36 points

Despite the problematic Deutsche Bank (DBK) managing to avoid putting in new lows last night, Europeans remain in a real panic over the state of their finance sector and this is continuing to dampen any chances of hope and optimism as sellers continue to overwhelm equity markets. While this latest source of fear is fuelling signs of fresh capitulation from some investors, it's important to note that Rivkin's model ASX equity portfolio is down 9.44% in the last 12 months, versus -16% for the ASX 200 and -12% for the ASX 200 accumulation index. We would normally do a little better than this given our two-thirds market-neutral model; however, a change in the mood of interest rate markets last year meant that our hybrid debt holdings traded with a higher correlation to the broader market than usual. Nonetheless, panic is certainly not present at the Rivkin office because alongside our core ASX equity strategy, we have a Global long/short strategy that has been very lightly invested throughout this patch due to an absence of low-risk trade setups and a Low Volatility strategy that has profited on the back of gains in bond and precious metal markets. (Rivkin's Low Volatility strategy is available to investors with single deposits of $500,000 or more, please email thomas.silitonga@rivkin.com.au to find out more.)

One market that is bucking the trend at present is gold, and I would imagine that the philosophy behind this is similar to that which drove the 2009-2011 rally - the market is betting that central banks will be forced to stabilise markets using any means available, and this will--once again--act as a catalyst for gold bulls to increase their wagers on the basis that the value of paper money in Europe and the US is diminishing. I'm always careful not to prompt any arguments about the case for and against gold (the responses I get from this debate are generally as passionate as they are polarised), but the cost of goods and services exchanged for paper money is certainly not rising in Europe, and therefore there is limited disincentive for the European Central Bank to try and help markets. In today's second chart, you can see in a longer-term context that gold's recent rally is looking too impulsive to constitute a sustained move, so it's a risky long trade at this point.

The most encouraging things I've read today are the news reports that "Global markets have entered a bear market." Really? This was decided just last night? Have we not been in a bear market for months? It's quite a subjective term, but signs like these ones clarify there is no more 'denial' being bandied about, and therefore we must be pretty low on the left-hand-side of the investor emotion cycle.

There is a fourth-quarter Euro-Zone GDP release out at 9pm Sydney time tonight (1.5% year on year expected) and Euro-Zone sentiment survey out next Tuesday, and we may start to see more commentary emerge with regard to what the European Central Bank (ECB) is going to do to stabilise markets over there. While politically difficult, the ECB's balance sheet expansion still has a way to go before it reaches the level of the US Federal Reserve's. And given German banks are now on the receiving end of a liquidity crisis, there may be more of a chance of assistance from them this time around. So as far as upside risks are concerned, I think an imminent announcement by the ECB will be the next event that could lift markets.


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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