BNP Paribas: Hungrige Jäger

The euro has gained; events in Ukraine have barely had an impact; bonds have rallied and Japan has disappointed. What are the lessons? Consensus trades have inherent risks: the rationale may be so appealing that the trade is overcrowded and has little ‘juice’ left. To complicate matters, identifying a consensus trade is often easier said than done. If, however, investors can get into such a trade early on, it can pay off handsomely. Think of high-yield bonds in recent years. Another lesson is that if there is no catalyst to drive the market – as apparently in the case of Japan now – being positioned means incurring an opportunity cost. The third lesson is the need for exhaustive analysis. The euro has been expected to weaken the premise that bond yield differentials would turn against it. Differentials have risen but other, less obvious, factors took precedence. Fourthly, markets can be complacent – just look at their current stoicism even in the face of mounting geopolitical risk. Finally, central banks still dominate markets. Janet Yellen and Mario Draghi’s comments have caused long US yields to fl atten and ‘peripheral’ spreads in Europe to narrow impressively.

In summary, investors appear to behave like hungry hunters. They’re impatient (positions need to pay off today rather than tomorrow), focused (on opportunities with a clear catalyst) and heed signals (from central banks). One could add they tend to hunt in packs (which explains the role of momentum).

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