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The main trading recommendations of Goldman Sachs for 2012

The American bank’s suggests the following strategies as its flagship trading recommendations in 2012: Short on the German bund with an expected 2.8% 10 year return and long EUR / CHF with 1.35 as target…

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Short of the 10 year German bund with a 2.8% target (opening at 2.3%, stop loss at 2%) with a potential return of 4.5% on the strategy

According to Goldman Sachs, financing constraints and the deterioration of the economic outlook will act as a “forcing mechanism” leading to an agreement on further fiscal integration of the Eurozone with eventually budgetary constraints supported by sanctions. This step forward should clear the way towards a partial “mutualisation” (direct or indirect) of existing stocks of debt. In both cases, this would lead to transfer of credit risk towards the core European countries and a relaxing of systemic tensions which lead to a violent flight to quality.

Once the agreement on budgetary flows is brokered “we also expect the BCE to adopt a more energetic response aiming to reduce financing costs and support the debt reduction process” has indicated the American bank.

Within this context it recommends being purely and simply short on the 10 year German bund. It suggests entering the trade on a 10 year return level of 2.3% for a targeted 2.8% return. The strategy would be completed by a 2% stop loss.

Long EUR / CHF with a target of 1.35 (opening at 1.2260, stop loss at 1.20) and return potential of 11% on the strategy including the cost of carry

With correlations on risky assets having a very strong impact on foreign exchange markets, it is hard to find exchange rates which offer asymmetric returns. A strategy put forward by Goldman Sachs in order to neutralize this problem is to find currencies which heavily influenced by monetary policy decisions.

The Swiss National Bank is currently striving to maintain a EUR / CHF exchange rate above 1.20. “This quantitative easing policy is compatible with the rapid slowdown of the Swiss economy and the deflationist pressures. We believe that this recommendation could work in two scenarios. The first one would consist in an extended weakening period in Switzerland’s economic activity which could be linked to a worsening Eurozone crisis. This could lead the SNB to be even more aggressive in its intervention by raising its floor level which we now predict at 1.30. The second scenario would be a partial solving of the sovereign debt tensions that could cause some safe haven trends to reverse. Globally, it appears that there are several scenarios which could lead to a strengthening of the EUR / CHF rate while the weakening risks look pretty limited to us” indicate the analysts of Goldman Sachs.

Below are the other main strategies recommended by Goldman Sachs:

- Short on High Yield European Credit (through the purchase of protection on the iTraxx Crossover index), for a 950 basis point target (opening at 770 bp, stop loss at 680 bp) with a potential return of 4.5% on the strategy.

- Long on Canadian equities (S&P TSX) and short on Japanese equities (Nikkei), FX unhedged, with a target of 120 (opening at 100, stop loss at 90) and a potential return of 20% on the strategy

- Long on the (CNY,MYR) currency basket v/s the (GDP, USD) basket for a 107 target (opening at 100, stop loss at 98) with a potential return of 7% on the strategy.

- Long on the July 2012 ICE Brent Crude Oil future with a target of $ 120 / bbl (opening at $ 107/bbl, stop loss at $ 100/bbl) with a potential return of 12% on the strategy.

Next Finance , December 2011

Article also available in : English EN | français FR

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