As a self-styled central bank Kremlinologist, I pay close attention to what policymakers say, when they say it, and how they say it. But to take central bankers’ statements and turn them into actionable trade ideas – that requires two additional steps.
The first, is that you must be nimble during a crisis – during highly volatile markets. The tides can turn quickly, and previously held ideas need to be discarded and new ones need to be embraced. This means if you’re short the market, you need to be willing to turn on a dime and get long. You can’t be married to a position. The second, is that you must be confident in your knowledge gained from prior market experience. If history doesn’t repeat, it certainly rhymes. Building a library of past market episodes and historical occurrences is necessary – either experientially (by trading) or episodically (by reading market history and reviewing data to model and backtest).
These insights are drawn from the events in March 2020, when financial markets were in a dizzying tailspin. But on March 26, 2020, Fed Chair Jerome Powell said something producing a sense of deja-vu in an interview with NBC’s Savannah Guthrie: “we’re not going to run out of ammunition.” Having been active in markets during the Eurozone debt crisis, I was reminded of then-ECB President Mario Draghi’s July 2012 comment about doing “whatever it takes” to save the Euro. That marked the bottom in peripheral European bonds, and the beginning of the end of the financial market-aspect of the debt crisis. Draghi’s comment, in hindsight, proved to be the all-clear signal for risk-taking in Eurozone financial markets.
I quickly recognized that Fed Chair Powell’s March 2020 comment was cut from the same cloth as ECB President Draghi’s July 2012 comment. While I was not able to fully take advantage of the July 2012 turn in markets – I was younger and more stubborn, and didn’t have the breadth of knowledge I do today – being nimble in my positioning and confident in my knowledge (gained both experientially and episodically) allowed me to take advantage of the turn in financial markets this time around.
Plus, you know, ‘never let a crisis go to waste.’
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
