Tag Archives: DAX

­­Our Two Cents – Week of 1/3/12

The crystal ball atop New York City’s Times Square has dropped, champagne glasses have clinked and confetti has strewn—all signs welcoming 2012. As we said goodbye to a year that saw economic commotion, we greeted the new year with a refined sense of optimism for the U.S. and equal thoughts of hope for abroad.

Americans are more confident about 2012 after what they say was a less-than stellar 2011, according to an Associated Press poll. Nearly 70 percent of Americans said 2011 was a poor year because of continuing economic crisis, and 62 percent said they were hopeful for a more positive 2012. About 37 respondents said they saw economic improvements coming within the next 12 months, and almost 40 percent believed their personal financial situations will improve. Signs that the U.S. economy is starting to accelerate are already coming to fruition. Experts say an improving job market and increasing retail sales—especially in the past holiday season—are reasons for why growth in the U.S. economy may hasten even if conditions abroad aren’t replicated. Holiday sales during the week ending Dec. 24 ascended nearly 15 percent from the same period in 2010 to $44 billion, thanks to Christmas Eve falling on a Saturday.

While the U.S. conditions are rebounding, Europe’s markets are starting 2012 on the right foot. Italy’s FTSE MIB index is up nearly 1 percent, and Germany DAX is also up more than 1 percent. Yields in Italy are down to below 6.9 percent.

In the last few days of 2011, Italy’s Treasury paid significantly less to borrow money for six months than it did a month ago, restoring some senses of economic confidence. Even though Spain has slipped into recession, the country’s inflation has eased much more than expected in December to its lowest level in 13 months. Inflation rates also relaxed in Germany for the third straight month.

Speaking of Germany, it received the highest mark on the Bank of Montreal’s economic report card of the world’s most important economies in 2011. The nation earned a score of 89.2 because of its 2.5-percent inflation rate, 7.1-percent jobless rate and 1.2-percent budget deficit. Greece closed the list at No. 12 because of its 3.2-percent inflation rate, 16.6-percent jobless rate and 5.9-percent budget deficit. The U.S. earned the No. 6 spot for its 3.2-percent inflation, 9-percent jobless rate and 10-percent budget deficit. The bank based ratings on low inflation, low unemployment and low budget deficits.

The year 2012 also observes the 10th anniversary of the euro. While some individuals blamed the euro for causing Europe’s economic meltdown, the monetary unit could become the world’s leading single-currency alliance if leaders can succeed in tightening fiscal integration, according to one official from the European Central Bank. ECB policymaker Christian Noyer said if European officials can implement the actions from the Dec. 9, 2011, emergency summit, the union will emerge stronger.




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Volatility has been at the top of many trader's minds of late. It's hard to miss the references to the VIX on CNBC and elsewhere in the media. I heard someone suggest that volatility is an asset class of its own now. Volatility is derivative, of course, so that can't actually be the case, but it does speak to the fixation there is in the market at this point.

The amount of chatter, though, makes me wonder if people have forgotten what things were like in 2008. I mean look at where the VIX is now compared to where it was three years ago. It's not even close. Heck, it didn't even get above the peak from 2010 at its highest levels during Q3.


Of course the VIX, which is a measure of the implied volatility of index options, is only one way to look at volatility. We can also look at price-specific volatility.

The DAX has been at the heart of the risk on/off ups and downs of the global markets through this whole sovereign debt crisis, so it's worth taking a look at that index. The chart below shows the weekly performance going back to late 2008.

Turn your attention to the two sub-plots.

The top (blue) one measures the width of the Bollinger Bands relative to the 20-week average. This is the Band Width Indicator (BWI), which measure the volatility of closing prices. Notice how it's gotten above 50 recently, which is quite high, but not quite up to the level reached late in 2008. It's also started turning down, which likely means we've seen the peak.

The bottom (green) plot is Normalized Average True Range (N-ATR), which evaluates volatility in terms of ranges. We can see that N-ATR has been rising over the last few months, though remains well below the late-2008 peak. It may yet keep going a bit further because of the lag effect, but it's going to take some very wide ranges to revisit the old highs.

What we have to keep in mind is that volatility tends to max out during the bottoming processes. While I can easily see the DAX falling back down toward its lows for the year, and there probably will be a lot of back and forth action, my feeling right now is that a major downside extension at this stage isn't in the cards. That gives the dollar room rally up again, but I'm not yet sure whether we're seeing a bottoming pattern there, or just a consolidation in the bigger downtrend.