After a long series of better than expected quarterly earnings, equity markets could find difficult sledding in 2012. About the most promising development is the fact that investor and consumer sentiment is set to end 2011 at very low levels. However, at the beginning of December speculators were still holding net long positions across most of the US stock indices, and that suggested a sizable portion of trade remained confident that the global economy would avoid a return to recession.
Many central bankers might be poised to monetize their debt or, in 1970’s parlance, decide to “inflate their way” out of the current debt crisis. While many traders (and economists) think that strategy won’t work in the current environment, it won’t stop those countries with no alternative from doing everything in their power to foster growth. China could already be moving to diversify its US Treasury holdings by attrition. They might not openly move to reduce their new purchases, but they might attempt to redistribute and perhaps work in the secondary market to diminish their exposure to US debt.
In the end, we suggest traders consider the purchase of far out-of- the-money, long dated Treasury put options, as a tempering of the Euro zone crisis, positive growth in the US, or attractive fixed income alternatives could result in US Treasury prices falling by as much as 12 points.