2012 Outlook

The year 2011 has been marked with extreme volatility, much to do indecisive politicians that have not only shown a lack of decision making and slow response to changing environments, but that have actively worked their way towards the wrong direction and into a corner. As such, when I received the following quote from an acquaintance, I could do nothing but concur.

As Year end draws nearer, the worry is the main positive for 2011 is it's looking likely to be a whole lot better than 2012...

There is nothing that would indicate the volatility to decrease in 2012. What has changed, however, is the psychology of it all. It is amazing what people, and then in particular market participants, can get used to. An equity index move of 3-5 per cent points is now nearly to consider normal, and at least don't prompt too much attention. The investors are also a different breed, and trying to learn to take advantage of the volatility to increase earnings, and act counter-cyclically to take advantages of dips in the market.

For the Fixed Income space, the phrases regulatory risk, execution risk and event risk has truly been experienced, and players are adapting to expect to wait for windows for proper transactions depending on the surroundings.

All of this is likely to continue, and the world is bracing for outcome of a break-up of the European monetary union. This coming week the International Swaps and Derivatives Association will hold a webcast with its members next week to discuss what would happen to euro-denominated derivatives contracts in the event of one or more countries leaving the euro zone.

Personally I'm not expecting a full-fledged break-up of the union within 2012 where the Euro completely cease to exist, resulting in a dependence on Lex Monetae for interpretations of contracts, but I do consider it likely to have one or several countries seceding the euro-zone and getting a New National Currency (NNC), which can result in interesting contractual effects and monetary flow control (prohibition of exporting hard cash from a country can result in a foreign governed contract not being enforceable still)

If nothing else 2012 looks to become a very interesting year - but not a year for the weak minded.

Thank you EU Commission

After the reuters story about a greek aid package I shorted the spike expecting a reversal for the rumor ...

DJ New Greek Plan Would Include Increased External Funding -Reuters
DJ EU Agrees In Principle On New Greek Plan -Reuters
DJ New Greek Plan Would Run 3 Years -Reuters

What I did not expect was for it to be so quick, and the reason why? EU Commission denies the whole thing

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Ended up as one of my definite better trades lately, so a great thanks to the commission.

Bearish on EURUSD

While having an underweight view on equities other asset classes are worth a look. In addition to credits, one of the more interesting to follow, in my opinion, is foreign exchange speculation.

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EURUSD is currently trading below the option barrier around 1.45 after having enjoyed a revival over the past two weeks (circled), as the sentiment towards the Greek situation has improved. In my opinion, however, the peripheral EUR situation is still so vulnerable (Portugal avaiting a general election shortly isn't exactly helping) that I expect a reversal of the past few week's gain, down towards the 1.40 - 1.41 area (38.20 fibb level at 1.4144 and 100 dma at 1.4061).