Divyang Shah, Senior IFR Strategist
We have seen from the FX market with the AUD recently as to what happens when excessive positioning takes a turn. Despite the 7.3% fall on the Nikkei we are back to levels last seen on May 10 — that is less than 10 trading days ago.
The sharper the rise the more violent and extreme the fall. But its not just the Nikkei that has had a good time with highs multi-year and even record highs registered on the FTSE, DAX and S&P500.
This is simply the QE related risk trade which given the uncertainty over tapering QE injected by the Fed some trimming of longs is to be expected.
The pick-up in volatility is likely to be maintained going forward as central banks look to nuance the debate but the backdrop of major central bank liquidity remains supportive for a continuation of risk taking once the current bout of position adjustment of one-way bets has run its course.
The current state of play is that the punch bowl is not only full but is now overflowing with liquidity. The tapering debate does not mean an end to the punch bowl just an end to the excess.
