Via Bloomberg’s Richard Breslow,
When trading, it always helps to have a grounding in the forest as you try to navigate through the trees.
Having been away for a couple of days, it looks like there is a pretty reasonable understanding out there of the big picture, but traders have been busy repeatedly slamming, or being slammed, into every obstacle along the way. It hasn’t made for pretty reading and, even less so, watching. The markets have not distinguished themselves as sound bites have taken over once again as the primary mover of prices. Noise and data-dependency aren’t the same thing.
It is obvious that things are out of whack when foreign exchange markets trade like they are the adults in the room. They have been unambiguously unimpressed with the goings-on. And prices have settled into a no-man’s land area, not sure which narrative to buy. Perhaps, “none of the above” is entirely appropriate and hence, we sit.
Fixed income markets are solidly in the “something just doesn’t feel right” camp. Whether numbers come out strong or weak. Whether central bankers, depending on the day and setting, are tougher or weaker. There is an unrelenting bid for paper. Rate cut pricing may be pushed out or brought forward, but it remains the base case scenario.
Ten-year U.S. Treasuries made one feeble attempt over the last month to get above 2.60% and are now approaching important support. German yields have slipped back below zero. No matter how many green shoots analysts claim to see. And while I’m not sure it is advice I would follow, there are calls out there for Chinese yields to retest Fibonacci levels we were assured wouldn’t be seen again.
Commodities trade like everyone has them, keeps trying to buy and can’t believe the price action. The tariff up or down saga aside, the second half of year resurgence story notwithstanding, these assets haven’t been behaving as if animal spirits are anywhere to be seen. If you like them, this is in fact a buy zone. But that has been said numerous times on this move down. The Bloomberg Commodity Index below 80 is either a great opportunity or a warning sign. The fact that it isn’t at all clear seems entirely appropriate.
And then there were equities. The asset that squeals in pain or with joy over each revolving trade comment. The most popular parlor game out there is to add up how much “wealth” was created or destroyed with each utterance. In truth, while there has been some added intra-day volatility, they have done nothing wrong. Even the VIX Index hasn’t been able to properly feign fright
Can they go down? Sure. But the puts exist. And they come from all sorts of sources. It’s a mistake to focus too narrowly on the Fed. Even if that is a good place to start. There isn’t a central bank in the world that doesn’t keep close tabs. The PBOC announced a targeted reserve requirement on Monday and very few observers thought the exact timing was a coincidence.
More importantly, there was a story out over the weekend about Norway’s sovereign wealth fund. When the equity markets were getting hammered at the end of last year, they were busy loading up for their stock portfolio. Their counterparts must have sure had an interesting insight into market dynamics. The fund made a tidy $84 billion in the first quarter of this year courtesy of the rebound. Their best ever.
Traders seem to have a pretty good idea of what they believe. Now it is all about timing. And deciding if you can afford to ignore the man behind the curtain.
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