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Knowing me and knowing you

'Volatility is set to rise’ is a fancy way of saying ‘bumpy markets ahead’. Experience tells us that the exact reasons why stock prices fluctuate are far more difficult to predict. In hindsight, common sense usually blames particular events.

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Elections are a no-brainer, of course, and Inauguration Day could also be blamed depending on whether the outcome is too noisy or too calm. Blaming the pandemic is another valid fall-back option. Yet the real reason may just be far more unspectacular – what we call ‘technical factors’. You are right, this sounds so boring. This is exactly why it does not hit the headlines.

Take the US elections back in November: stock markets tumbled into most of the end of October just to bounce back ahead of the elections, which led to lots of head scratching. Was it due to the blue wave, pre-election positioning? Guess what: end of October marks the year end for many large US funds and is a closing date for tax matters. Looking back, the helter-skelter three months ago may have been more due to end-of-quarter-related repositioning than stock markets anticipating a particular election outcome.

Rotational repositioning
We had similar disruptions in 2018 when stock markets tanked at the end of January/early February. This coincided with the end of the first fiscal quarter for the very same US behemoths. Therefore, what could happen in the next few days or weeks may simply be some rotational repositioning by some of the ‘big guys’. Of course, we can only guess what they are up to. Looking at the economic set-up, there should be a rotational aspect to this, as overall liquidity remains quite benign. In other words, large investment funds may ramp up a bit of their cyclical exposure into the new quarter, taking some profits on their long-standing growth darlings.

However, there is no guarantee here. Even flash crashes are not unusual during such moves. Yet we are maintaining our pace and downgrading some of the very same beloved areas, such as communication stocks while adding cyclical assets, such as Mexican markets.

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