Is risk aversion back?

The economic data continues to feed through on the weaker side and in the absence in any major news the market continues to drift lower.

Last week was good week for our shorts as the market gave back 2,8% and we made some good money by shorting the market.

We used the opportunity to take some trades off the market, as the low volume is making me a little nervous. We expect things to be a little quiet in August, but volumes were down 30% on Monday and you don’t really want to play in that space.

Something that has been creeping up in the background is the yields on European bonds, and this is an excellent barometer to risk. When yields fall, risk is off and when they rise, the risk is back on.

If one takes a look at Ireland, thought to be the more stable of the Eurozone countries, the spread on its sovereign credit default swaps rose by 41%.


And the problem is not local, and what makes it ever more strange is that there was no bad news out on banks or slowing GDP numbers either. In fact, the German GDP numbers that were recently released were excellent and showed that a weakening Euro actually has a silver lining.

Rather it appears Ireland has been caught up in a renewed risk aversion. Irelands spreads widened last week in tandem with those of Germany, the UK, Italy and France, as with other European debt, which was up by more than 25%.

Bond markets tend to be ahead of the curve, so to speak, and one needs to keep these on the radar as countries like Greece are now sitting with yields on their 10-year bonds out at 11%, which is getting close to the levels of pre-crisis.

I still feel that we will finish August lower than we started it, so happy to run the portfolio net short. But with risk looking like it’s sneaking back on, it’s best to keep some powder dry.

  • Nick Kunze is head of dealing at BJM Private Client Services
  • Traders’ jargon:
    “Long” is when you have bought a share with the expectation of the share price going up.

    “Short” is when you have sold a share you have borrowed with the expectation that the share price will fall and you will buy it at a cheaper price to settle the deal.

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