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Uncertainty poses challenge for both bulls and bears

A classic distinction in markets exists between bulls and bears, the snorting herd of enthusiasts and the pessimists who roar at them from caves, waiting for a panicked stampede.

Yet a sign of the uncertain outlook, with the consequences of the incoming Trump administration unknown, elections due in Europe and Brexit still to begin, may be how those labels don’t fit quite as easily as before.

For instance, in a Mayfair ballroom this week clients of Société Générale gathered for the annual event thrown by the bank’s so-called alternative strategy team, celebrated for their persistent and wide ranging scepticism.

A year ago, with the oil price collapsing, China intervening to support its currency and world markets tumbling, the room was packed with investors there to hear how debt-funded booms foretold what then felt like imminent financial doom.

This year, however, the mood and the message was less clear cut. “The clients aren’t interested in me telling a bearish story about equities,” says Albert Edwards, SocGen strategist. “I’ve reached that stage in the cycle where I’ve got plenty of other things to talk about.”

He instead turned his focus to more wide-ranging sources of pessimism. Those included the future of the “failing” eurozone, the precarious state of UK housing, the rise of protectionist policies and the US bond market.

Speaking after the veteran bond investor Bill Gross had suggested 2.6 per cent was a “key” level for the US 10-year Treasury in 2017, Mr Edwards argued the benchmark could breach 3 per cent and “still be in a long-term bull market”.

He also dismissed attempts to predict equity prices based on movement in bond yields. “The equity market won’t care . . . The equity market doesn’t care about anything,” he says.

As for the bulls, Goldman Sachs hosted the 25th incarnation of its London investor conference on Monday, in a room of its Fleet Street offices which could pass for a regional assembly. Much of the optimism on offer was incremental, relaying a sense of stability rather than boom.

The US stock market will end the year higher, but only with an overall gain of 3 per cent. Basic commodities are a good investment again, but more for the slim profits accruing from holding futures contracts as they gain in value over time, rather than benefiting from big moves in price. Holding more cash than normal was also recommended.

On Europe the message from Goldman’s economist for the region, Huw Pill, was one of expecting more muddling through: “It’s quite crucial for our forecasts that the type of nominal and real growth we foresee is just about enough to head off the populist political challenges which Europe faces. So Europe is moving sideways in a way that doesn’t really solve problems, but isn’t going to bring a cathartic moment which produces a market crisis.”

The dollar, meanwhile, seemed to unite the bulls and bears on its direction — upwards against a basket of currencies in continuation of a two-year trend — if not on the effect.

Guest speaker at the SocGen afternoon for bears was Raoul Pal, a former hedge fund manager and writer of The Global Macro Investor. “The big story no one talks about,” he says, is the offshore dollar market where borrowing in the reserve currency has reached $10tn.

Mr Pal described this as “the largest position ever seen in financial markets”.

“It is enormous — it dwarfs anything else as a speculative position,” he says, pointing to overseas borrowers of the currency. “If the dollar moves, this is not their currency.”

He adds that the dollar, which has risen over the past year against a basket of currencies, is set for further strength. “There’s so few dollars in the world that people are scrambling for dollars.”

Yet Kamakshya Trivedi, emerging market macro strategist for Goldman, was sanguine about the so-called Trump Trade effect on emerging markets, with countries and businesses able to adjust “as long as you’re moving in the range of less than 1 to 1.5 per cent of broad dollar gains on a monthly basis”.

When it comes to the UK, however, few disagree about one consequence of Brexit. A sterling rate of $1.14 in 12 months was likely, according to Silvia Ardagna, Goldman FX strategist, who believes “the government is well on track to trigger Article 50 by March”.

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