Why markets are up, risks that are underpriced, indicators to watch – Interview with Ipek Ozkardeskaya

Why are Wall Street and Main Street going in different directions? Ipek Ozkardeskaya, the Senior Analyst at Swissquote, provides convincing explanations and talks about what is next. In a wide-ranging interview with Yohay Elam, she touches on underpriced risks, critical dates to circle on the trading calendar, why gold has lost its shine, technical indicators to watch, and lots more. 

Yohay Elam : Happy Friday Ipek!

Ipek Ozkardeskaya : To you too Yohay, how is it going?

Yohay Elam : I'm ok, thanks. We can get out of the house at specific hours here in Spain, so it's a relief after seven weeks of lockdown...

Yohay Elam : How are you doing?

Ipek Ozkardeskaya : Very well, in Switzerland, we didn't have a strict lockdown, so the lakeside was always there for us. Sure! One thing I watch is the AQI index to predict the Chinese industrial production - and it is quite a good indicator for me. And it is back in force. Having said that, let's look at these markets!

Yohay Elam : AQI index, every day I learn something new

Ipek Ozkardeskaya : Air Quality Index!

Yohay Elam : Ah...

Yohay Elam : I heard that cars are filling up Chinese cities, but usage of public transport is still below pre-coronavirus levels

Yohay Elam : And in general, industry is back to business, more or less, while services are behind, a global phenomenon

Ipek Ozkardeskaya : Well, services are lagging because of people's reluctance to show up on public places, whereas the industrial workers aren't given the choice I guess. That's why, industrial-heavy economies will likely outperform in terms of recovery. And China is really well placed to do so.

Yohay Elam : And that contrasts service-leaning economies such as the US

Ipek Ozkardeskaya : And the UK, southern Europe...

Yohay Elam : Indeed

Yohay Elam : We are having this conversation ahead of April's Non-Farm Payrolls, which will surely be depressing

Yohay Elam : Yet stock markets, especially in the US have substantially recovered

Yohay Elam : Is it all due to the Fed? Other factors?

Ipek Ozkardeskaya : It is extraordinary, isn't it!

Ipek Ozkardeskaya : Well I believe that the economic data has deviated so much from historical averages - and even relative to prior crisis periods', that investors have lost track of it. So we know that the numbers will be bad, very bad, and the market is prepared for it.

Ipek Ozkardeskaya : Obviously the fact that the expectations are already so low, and priced in, means that the market mood doesn't get too bad when the actual data is printed.

Yohay Elam : It is probably impossible to grasp the magnitude of the downfall

Yohay Elam : Are markets immune? What could bring stocks down?

Ipek Ozkardeskaya : It is good question. Markets are not immune, but investors have their back covered by massive central bank aid.

Ipek Ozkardeskaya : If the prices fall, more cash is injected in the system, and that additional cash ends up feeding into the equities. Sooner or later. Therefore, the risk of a sharp unwind is always there, but the long-term direction is pretty much defined to the upside.

Ipek Ozkardeskaya : Nasdaq already recovered 80% of Covid-led losses

Yohay Elam : Indeed, tech stocks have outperformed their peers

Yohay Elam : Investors have few places to go, bond yields are low

Ipek Ozkardeskaya : Indeed, the tech outperformance is totally understandable, however, we have seen the Dow stocks recovering more than 60% of losses, as well. And that, despite ugly earnings results, with hundreds of earnings call hinting that the economic damages have gone well beyond what we have seen during the 2008 financial crisis and 2000 tech bubble burst. So, if a part of the upside correction is investor optimism, a good part is thanks to the central bank support.

Yohay Elam : You have recently spoken about deteriorating Sino-American relations in your videos.

Yohay Elam : It has had some impact on markets, but now seems to have calmed down

Ipek Ozkardeskaya : Before the coronavirus crisis, the US-China trade tensions were making the headlines. Now it is possible that it comes back in force, as the phase-one deal which took more than a year-and-a-half to get signed is at jeopardy. Now one major implication of deteriorating American-Sino relations will be slower global recovery. Therefore, unpleasant news on this hand will remain a pending risk in the equity markets. We can see sudden and sharp market sell-offs, but the long-term implications should be soft. Because the negotiations will always bear hope that things would get better, no matter how ugly they got. This is the pattern we have seen during the phase-one negotiations. Yes, we had a severe market rout by end of 2018, but it didn't prevent the US stocks from getting back on the back of a bull and renewing record after record. Until we hit the Covid wall.

Yohay Elam : Indeed

Yohay Elam : We have mentioned the Federal Reserve's massive support

Yohay Elam : Other central banks have also acted and are ready to do more

Yohay Elam : The European Central Bank has faced a challenge from the German constitutional court, but President Christine Lagarde seemed to shrug it off

Yohay Elam : Do you think the ECB will expand its QE program, the special PEPP? And how would that affect the euro?

Ipek Ozkardeskaya : That's the million-euro question. Christine Lagarde said that the ECB will continue giving the necessary support to the market - and that the decisions already respect the principle of proportionality, but now the ECB needs to prove it.

Ipek Ozkardeskaya : One major challenge is to prove that the massive government bond purchases are okay. And they have three months to do so. Objectively, the ECB actions are not disproportional to their mandate, as despite the massive purchases, the inflation is still trending downwards. However, the ECB's balance sheet is ballooning by the day, and the huge amount of government debt that the bank has been buying is now interfering greatly with the financing of this debt. Think about it, governments issue debt, and the ECB prints money to buy it. There is something wrong here. Giving support to the economy is one thing, distorting the system is another. This is where the German court wants to make sure that the ECB is not crossing the line.

Ipek Ozkardeskaya : I still believe that the ECB will find a way to convince Germans to carry on with the actual PPSP and PEPP programs, however, with the PEPP which should hit its limit by October if the ECB continues buying at the current speed, they may not be able to extend it as much as they would have, otherwise.

Yohay Elam : Indeed

Yohay Elam : It seems that monetizing the debt is creeping in

Yohay Elam : The UK government used its account with the Bank of England

Yohay Elam : Supporting the economy and keeping inflation from falling is one thing and directly funding the government is another

Yohay Elam : If the ECB hits its limits and is unable to expand its QE program, how would the euro react?

Ipek Ozkardeskaya : If the ECB has a narrowed scope of action, the euro will likely take a bad hit. In fact, the fact of printing cash to buy government debt should, in theory, be negative for a currency. But investors have blind faith in ECB and the euro. And surprisingly, the unorthodox policies are being priced in positively in the market, on the idea that the monetary policy boost will allow the economies to recover faster from the coronavirus-led recession. If the ECB is obliged to pull the rug from under the feet of the European economies, the prospects of recovery would collapse, and that would have a clear negative impact on the euro.

Yohay Elam : Indeed, coronavirus upended the logic that printing money is negative for the exchange rate

Yohay Elam : The pound moved a bit higher when the BOE opened the door to more QE

Yohay Elam : Speaking about the pound, you have mentioned Brexit as a risk factor

Yohay Elam : Are markets pricing in a no-trade-deal Brexit?

Yohay Elam : Yes, the possibility of a no-deal Brexit is a risk factor and more importantly, it is an under-priced risk factor to me.

Ipek Ozkardeskaya : Boris Johnson has a firm stance, he wants the divorce to happen by the end of this year, and if there is no progress in negotiations by June 2nd, the UK will begin preparations for a no-deal Brexit, and the negotiations will perhaps get harder from that point.

Ipek Ozkardeskaya : June 2nd is less than a month away. It doesn't give much time to negotiators to seal a deal.

Yohay Elam : With so much focus on easing or not easing the UK lockdown, Brexit concerns seem to have drowned

Yohay Elam : Moving to something else,

Yohay Elam : Oil prices have staged an impressive recovery

Yohay Elam : So much volatility is seen in crude, more than other markets in recent weeks

Yohay Elam : Do you think these sharp moves will continue?

Ipek Ozkardeskaya : Yes, I think the volatility in the oil markets is here to stay. The recent short squeeze is mostly due to an increase in tactical speculative long positions. Therefore, the end of the June contract will be the ultimate moment of truth: how much of the recent demand is real? In fact, we believe that the risk of another sharp sell-off is real as we approach May 18, the expiry date of the June contract, as investors will likely liquidate their long positions to avoid the physical delivery of oil. It is important to remember that there is plenty of unused oil in the market right now, and there will be no demand for additional barrels before the transport and production pick up.

Ipek Ozkardeskaya : We will rather be watching whether another dip in prices would be more or less than the last one. And I believe that we could see a softer fall this time around.

Ipek Ozkardeskaya : So I am more optimistic compared to those expecting a price fall toward the -

Ipek Ozkardeskaya : -$100 per barrel

Yohay Elam : Another date to circle on the calendar, May 18, in addition to June 2

Yohay Elam : Indeed, negative prices seemed extremely abnormal

Yohay Elam : Moving from oil to another commodity, gold

Ipek Ozkardeskaya : Oh, gold!

Yohay Elam : It has risen to multi-year highs

Yohay Elam : But is hestiating

Yohay Elam : Perhaps not that much of a safe-haven?

Ipek Ozkardeskaya : Well, actually we have seen the gold's negative correlation to risk assets is no longer a given. There may be two reasons behind it: gold prices have risen so much that the reduced upside potential does not provide a good hedge against a sharp market sell-off.

Ipek Ozkardeskaya : Or, investors pile into gold as asset prices move higher, on prospects of a sharp reversal in the equities rally.

Ipek Ozkardeskaya : Both ways, gold already served as a solid safe haven during the coronavirus-led sell-off.

Yohay Elam : Great insight, seems like gold exhausted its safe-haven status

Ipek Ozkardeskaya : Also, the very low sovereign yields give support to the gold market. But next week, the US Treasury is planning to issue $96 billion worth of bonds, including 20-year bonds, and that could move a part of safe haven flows toward the treasuries, despite low yields, and soften the gold prices.

Ipek Ozkardeskaya : It looks like the new comers wouldn't benefit from its safe-haven bienfaisance as much, indeed!

Yohay Elam : Since 2016, with Brexit and Trump's victory, politics seem to be playing a more significant role while economic figures have not had the same influence.

Yohay Elam : Had it not been for coronavirus, we would probably be talking more about the US elections

Yohay Elam : Do you think the US elections can rock markets soon? Or will investors only pay attention closer to November?

Ipek Ozkardeskaya : Very good question. It looks like this year's US presidential election will be overshadowed by that 'Chinese virus'. We will certainly be talking more toward November, but one thing is sure, the presidential campaign will take an important hit, and I expect to see a less election-centered mood in the market this year, compared to the previous election years.

Yohay Elam : Perhaps it will come into focus after America's Labor Day

Yohay Elam : Early September

Yohay Elam : China is already a topic in the elections

Ipek Ozkardeskaya : China is a sensitive subject. In one hand, Trump electors love seeing their President pressuring China, as they believe that China shouldn't have such a huge trade surplus with the US. And China is the only option for immediate relief for parts of the US economy, and Donald Trump needs China to play on his side. On the other hand, trade frictions with China has caused some economic slowdown since 2018. But the rally in the stock markets has mostly covered up for the sad truth. At the end of the day, it is a love-and-hate story, really.

Yohay Elam : The world's largest economies heavily depend on each other

Ipek Ozkardeskaya : They sure do! And Trump is lucky, as China has a very calm approach against Trump's attacks. They want to make things work.

Yohay Elam : Indeed, but they have a hard time because anti-China sentiment is rising all over the world, and is shared among Democrats

Yohay Elam : While markets are calmer in the past few weeks, volatility is still elevated in comparison to 2019, when EUR/USD was extremely frustrating

Yohay Elam : For relatively new traders, the past few months have been a change

Yohay Elam : I have seen in your videos that you use long-term channels on the daily charts

Yohay Elam : Should these serve as a guidance?

Yohay Elam : A guidance for long-term trends I mean

Yohay Elam : Or any other tips for new traders?

Ipek Ozkardeskaya : In principle, volatility is good for traders, it is the salt-and-pepper of trading, as there is some actionable moves in the market. I like using long-term trend channels to see the potential of the short-term price moves, and to predict near which levels we could expect to see a dip, or a top. How much more we could expect the EURUSD to fall, and when could we consider entering a positive tactical correction, for example. With the EURUSD, it has been quite spot on, the long-term trend channel base (near 1.0750/1.0700) did shelter decent purchases.

Ipek Ozkardeskaya : Also, the long-term trends give an overall idea of the market sentiment and I believe investors should be aware of the overall trends to make better trading decisions!

Yohay Elam : Always important to zoom out

Ipek Ozkardeskaya : Always!

Yohay Elam : And get the bigger picture

Yohay Elam : Any other technical indicators that you find useful?

Ipek Ozkardeskaya : I like using a mix of technical indicators. Those who follow my analysis know that I always have multiple moving averages, the MACD, RSI and Fibonacci retracements on my charts.

Ipek Ozkardeskaya : If I see a strong MACD, I always look at the RSI levels to make sure that there is potential for a further rise. So the key for me is reading technical indicators simultaneously.

Yohay Elam : The more the merrier, stronger conviction

Ipek Ozkardeskaya : Yes, without crowding out the charts too much, though

Yohay Elam : Indeed, you do not want to turn them into a piece of modern art

Yohay Elam : Which may be pretty, but less useful

Ipek Ozkardeskaya : Exact, sometimes, less is more!

Ipek Ozkardeskaya : But you still want to have the minimum information to make your decisions.

Yohay Elam : Striking a balance

Yohay Elam : Between having more than the minimum and less than the maximum...

Ipek Ozkardeskaya : And consistency

Yohay Elam : Indeed

Yohay Elam : Thank you very much for all your insights. You have been extremely generous with your time!

Ipek Ozkardeskaya : Thank you very much Yohay, it was very nice chatting with you!

Yohay Elam : I have circled several dates on my calendar

Yohay Elam : The pleasure is mine