Giuseppe Basile’s reflections on Alfonso Esparza’s framework for analysis of social unrest in financial markets

MeetUpOn Thursday July 4, 2014 I had the honor and pleasure to host Alfonso Esparza as guest of the Toronto Forex Group, for a very inspiring, useful and practical presentation. Alfonso is a senior, experienced currency analyst with OANDA and publisher of MarketPulse. As a trader and market analyst I am into using a “modern variation” of Fibonacci to spot areas where participation of widespread classes of algorithms can be anticipated. So although I value fundamental analysis, I rarely make reference to it in my trading, as I find it is very difficult to integrate discretionary tools into my rule-based trading. But what I and the other several participants have learned from Alfonso at the July meetup is that there can be identifiable market, economic and geopolitical situations, like those developing from social dislocation (the topic of July presentation) that can be analyzed and explained using well defined conceptual frameworks.

This can surely be of help to any trader using any trading style. A great example is the study of recent movements in Turkey, originated by the third re-election of a president and a sit in in a park that snowballed into much larger protests. This caused – between Q2 and Q4 2013 – social unrest in Turkey that, combined with the potential withdraw or reduction of US money (after the FED started mentioning tapering), sent the Turkish Lira and the currencies of other emerging markets tumbling. As a result the Turkish Lira lost almost 30% in about 6 months, but the Turkish equity market remained relatively stable, with a slightly downwards bias. This confirms a number of very important, and in some cases unanticipated, facts when it comes to trading special situations like, for instance, the opportunities originated by social dislocation.

 

  1. The forex currency exchange against the dollar and other leading currencies will always see the wildest changes. Thus, the Forex is really the place to be when it comes to volatility, and you want to keep an eye and study social dislocation.
  2. Quick outflows out of the affected country will take place, also facilitated by size and liquidity in the Forex market, and decrease in demand for the currency is typically witnessed.
  3. Investors’ confidence in the country’s equity market can wane after continues protests and it is possible that some investors will reduce their positions. However a “crash” is not to be expected.
  4. Commodities always represent the safe heaven and will rise as some of the outflows from thecountry are invested in metals

The above points also represent, according to Alfonso, the areas where to look for impacts of social dislocation. As part of the presentation, a simple model for understanding the effect of social unrest has also been provided: the “Social Disruption Cycle”, which illustrates the evolutions of unrest as function of the possible responses from Governments. Unrest can be caused by several factors like, for instance, youth unemployment, inflation, population growth, economic crisis, political uncertainty. Governments can choose to respond to unrest in different ways that include acceptance and dialogue or oppression and further violence or larger unrest. The effects of internal factors like those mentioned above can also combine with several external or global factors that will make the analysis more articulated. Some traders call it the “big picture”, the main global developments of the moment: the “macro factors”. The current macro factors to consider, not only when evaluating social dislocation, that were discussed are:

  1. US Fed tapering and Bank of England anticipating a potential hike
  2. European Central Bank swamped in the deflation battle
  3. A 2% inflation goal of Bank of Japan (part of 2013 Abenomics)
  4. China slowdown

I like to conclude this article with a brief mention of another model offered by Alfonso. As an engineer and practical lover of conceptual frameworks and models, I could not leave out the “Disruption and Market Reaction” model. Particularly interesting is the role of social media in current markets: the bad news will break out whether the government and media will want it or not, and the Forex market will be the first to record the depth and anticipated effects of the social unrest. The other markets will typically wait and have a clear idea of the size and scope only after the government response, and international and social media will give a reading on the situation. Depending to the type of response, markets will calm down in case of peaceful resolution or continue their downward trend in case of oppression.

OANDA has gracefully offered access to the full recording of the presentation, including the Q&A session, and I heartily recommend you watch and learn from Alfonso. The presentation also explains the three steps to avoid being blindsided by social disruption and how to correctly read the facts, in relation to the dimensions and effects on the Forex exchange rate, the actions that can be anticipated and taken on investments and the monitoring of other asset classes. The simple and effective “framework” offered by Alfonso is completed by the current analysis of special situations represented by Turkey, Thailand, Greece, Brazil and Ukraine, offering both a lucid reading of the current environment and model examples and study cases of about how to go with the analysis.

Watch Alfonso Esparza’s presentation: “Social Dislocation: Identifying Actionable Strategies and Potential Immediate Market Dips” on MarketPulse at: http://www.marketpulse.com/20140721/social-dislocation-identifying-actionable-strategies-potential-immediate-market-dips

Alfonso is a senior currency analyst with OANDA and publisher of MarketPulse (www.marketpulse.com), a site specializing in forex, commodities, and global indices research, analysis with the goal to provide timely and informative research on major macroeconomic trends, technical analysis, and worldwide events that impact different asset classes and investors. Alfonso can be reached at [email protected]

Giuseppe Basile is a CMT, trader, mentor, technical analyst and active market researcher for IFTA/SIAT, in the markets since 2001. He is publisher ofwww.fibstalkertrading.com specializing in forex, futures and stocks trading and a unique trading edge: spotting Program Trading footprints on price. Giuseppe is FXStreet.com contributor and host of the Toronto Forex Meetup Group and can be reached at [email protected]

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