The Zigmont Report (Daily Market Recap for 5/29/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own

Italian troubles.  There’s been a growing, but small, concern with Italy over the last couple weeks.  Today it spilled over to global equity markets and the US market was the last one bonked on the head.  Why did the Italian concerns become something material over the weekend?  A lot of it is politics.  There’s a growing anti-European Union political group/movement over there and the chatter is getting louder and more serious/believable.  Italy will hold elections this summer so the status quo is up for grabs.

Here’s the plot of Italian 2-year government yields.  Notice they were *negative* until recently (mid-May).  Now they are spiking.

A long while back the economies and the debt of the following countries influenced global markets significantly:

  • Portugal
  • Ireland
  • Italy
  • Greece
  • Spain

PIIGS was how the street labeled them.  Thanks to ECB bond-buying and Greek debt restructuring and global central bank policies, those acute worries faded and life was good for the global risk-on investors for a long time.  The pendulum swung from panic to serenity and remained there for years.

The pendulum is swinging in the other direction now.

I don’t know how much worse things will get but without some kind resolution via election, I think it’ll take a big central bank action to put the genie back in the bottle.

That means, in the short run, risk-off will rule the markets.

I don’t know if the worries about Italy are justified and I don’t know if Italy leaving the EU (like the UK) is really that material… but the market is getting caught up in the act of worrying.

The act of worrying is a dangerous thing.  Momentum only builds one way (risk-off) and rallies will be fierce, fast, short-covering massacres.

This will be a horrible market to trade because realized volatility will large.  The conclusion of the crisis (which investors will be *begging for* soon) will be nasty too.  The ECB will do something major and risk-on is going to rip global tapes multiple percentage points higher in one session.

Hold on to your hats.  Choppy isn’t a strong enough adjective to describe what we’re about to begin.

See you tomorrow,