“THE WORST IS NEVER CERTAIN”
In his latest press briefing, Christopher Dembik, Strategy Adviser at Pictet AM, warns that this summer can be a worrying one, particularly in August, which is often a month of disappointment on the stock market. Monetary and financial crises have often erupted at the end of the summer, particularly in the heat of August.
Tensions over monetary risk, already perceptible, may become more visible and materialise. If these holidays are already booked in August, prudence and wisdom dictate that they should be taken as a currency hedge.
As recently as August 2024, poor US employment figures triggered a plunge in the financial markets. As a reminder, one of the most serious crises, the subprime crisis, began in August 2007.
Whether by chance or fate, the month of August is often the scene of profound crises. In 1971, the authorities surprised the markets by deciding in the middle of August to suspend the convertibility of the dollar into gold by the United States, in 1982 the stock market crash linked to Latin American debt, in 2011 the budget crisis linked to the US debt ceiling, and in 2015 China’s Black Monday with the triple devaluation of the Yuan. And the list can be extended to include 1990 (Iraq’s surprise invasion of Kuwait), 1992 (the collapse of sterling), 1993 (the crisis in the European monetary system) and 1998 (the coup in Russia, which almost bankrupted the LTCM fund). And every time in August. We could also mention the Asian economic crisis of 1993… but that was in July.
In conclusion, it is in the torpor of August, the month of storms, that financial accidents often occur. Some statistics confirm this, such as the VIX index, the so-called fear index, which was higher on average between July and September.
One explanation for the violence of the movements in the eighth month of the year is that volumes were sparser, due to traders often being away at the beach and institutional investors taking a wait-and-see attitude and holding lighter positions. Against this backdrop, the slightest tremor can turn into an earthquake with all this excitement.
Prevention is better than cure, as the saying goes. “The worst is never certain,” adds Christopher Dembik.
What worries the strategist most this June is the abnormal rise in volatility on currency pairs, such as sterling/dollar and especially euro/dollar. And the strong bullish positioning of hedge funds on the euro against the dollar.
Admittedly, the dollar remains overvalued by around 12% against the euro, 20% against Asian currencies and even theoretically by almost 50% against certain emerging currencies. The fall in the dollar is not economic nonsense, and it is not even something that US President Donald Trump wants. But if the downtrend were to accelerate too sharply, the markets could be destabilised. And perhaps more so in August, when volumes are low and panic is easier and more frequent.
“The foreign exchange market is currently very anxious and suffers from anomalies. The level of mistrust towards the dollar is not sufficient to justify them. For example, the implied volatility of the dollar/euro rose almost in isolation, to a higher level than the euro/yuan, an anomaly. Paradoxically, in the danger zone, dollar yields are rising and remaining high, while the greenback is falling. That’s the danger this summer, for the next three months, and a foreign exchange market to keep a particularly close eye on.
In fact, of the four devaluations of sterling in the last hundred years, three have taken place in September, after a month of August that had predicted the worst (including the 1993 move by the illustrious George Soros).
The yen, which is used as a carry trade (a currency in which speculators take on debt to take advantage of a low debt ratio and reinvest in another more profitable asset such as bonds, currencies, equities, commodities such as gold, etc.), is another currency that could shake up the financial market. With a possible Japanese rate hike in July, this could be an electroshock that could push up the yen. This rise may prompt speculators to untie their “carry trade”, i.e. rush to sell assets on a massive scale. But the danger of a rising yen may also come from the sale of US bonds by Japanese insurers, the proceeds of which are then converted into yen.
The portability of US debt
On another theme, and unlike some of his colleagues, US debt is not the central problem for Christopher Dembik. The solution to making this debt manageable is to internalise it, using the Japanese method. Warren Buffett and his Berkshire fund set an example, probably unwittingly, by investing some $300 billion in short-dated US Treasury bonds. To encourage this movement, the current US administration wants to give banks and other financial players greater freedom to invest in Treasury bonds, and also with a Fed that could play a role in buying US debt. The majority of US debt could be held mainly in US hands. “In this context, US debt becomes a false problem because it is better controlled, like in Japan and this pattern could be applied in developed countries, in Europe.
The main objective of the United States is to become less dependent on the rest of the world, as it is for its debt and its supplies of raw materials.
“Over the summer, we are cautious, with the exchange rate risk still flying under the radar and seemingly less well integrated into the markets at this stage,” insists the Pictet AM strategist.
So if you want to take it easy this summer, it’s best to take precautions. The most sensible option, according to Christophe Dembik, is currency hedging to protect against a fall in the dollar against the euro. It comes at a cost of around 3% a year (interest rate differential). And this hedging is also tactical, judicious since the consensus is betting on a further fall in the US dollar. It’s not going against the wind..
THE SHARES
From an equity perspective, US technology stocks remain attractive: “A share like Meta at 20 times earnings, with a net margin of 40%, cannot be called expensive. Of course, we cannot guarantee that the stock is at a low point. And the dangers of summer… “
After exiting at the start of the year, hedge funds have been buying technology stocks again in recent weeks.
On the European markets, most of the rally is probably behind us. Unlike the United States, Europe is absent from the long-term strategy of securing its back-up with deliveries of raw materials such as rare earths.
Emerging market debt in local currency is a good place to hide this summer, while European high yield (HY) may be a niche.
As for gold, while the strategist remains optimistic over the long term, he is wary of the short-term risks to the metal, which is not immune to sharp falls. “Gold remains a commodity that is not immune to risk, with forward contracts and deliveries. I wouldn’t be surprised if we had an accident like the one involving copper, which fell sharply at the start of the year.
A few figures..
The latest figures show that the US economy is expected to grow by between 1.5% and 1.7%, and the strategist is a little more optimistic about the extent of the rate cut in Europe, with a terminal rate that could reach 1.5%, assuming no inflation, compared with an estimate of 1.7% a few months ago.
The consensus is bearish on oil, but hedge funds are taking bullish positions. The strategist prefers to remain cautious and does not rule out a rise to close to $80.
And initiating tactical currency hedging is the solution for leaving with peace of mind and ensuring a better night’s sleep.
Christopher Dembik will not be going on holiday in August.
