Trader Warns “This Is A Test… Of Whether Geopolitics Still Matter”
Authored by Richard Breslow via Bloomberg.com,
It’s only the second trading day of the year and geopolitical events have already caused a sea change in market emotion. Whether it lasts remains to be seen. In past years, it was a major subject of conversation why events such as we’ve seen today didn’t have lasting effects on asset prices. It’s a sample of only one, yet where we go from here could be an early lesson in how to approach investing in the short-term. Is it different this time around?
The explanation for this phenomenon of markets seemingly not responding to disruptive events going on around them, of course, was central bank reaction functions. They were reliable and quick in making sure financial conditions were supported. Risk takers knew they always had the Fed on their side. Traders will listen to all official communications and speeches with rapt attention to try to assure themselves this remains the case. We might be back to a time when economic numbers are not the key driver of asset-price direction.
The first instinct of traders, albeit in an Asian market that still doesn’t have the benefit of Japan being open for business, was to assume it would be straight back to that same old paradigm of central-bank support. Early European trading didn’t try to disabuse them of that notion. Fed Funds futures traders are already crowing about having been more right than the FOMC’s dots about being on perma-hold. Here we go again.
We can’t know ex ante who will end up being right. There will be no shortage of market-moving events still to come. And that’s only the known unknowns. That’s another important thing to take away from the less than two days of trading that has already taken place. Extrapolation this early in the season is a very dangerous conceit.
On Day One, every tradable asset in the world made a new year-to-date high or low. Much too much was made of that accomplishment. Yet, I kid you not, there was no shortage of people assuring us that we could divine some new, and seminal, market intent from what transpired. Stocks up big. Bonds up, too. Very familiar territory.
So far today, there’s been all sorts of discussion about how far these allegedly “meaningful” reversals could go. And how long they might last. The takeaway should be, from a strictly trading perspective, nothing that happens this week means anything for the long haul. Trade. Or watch. But, please, please, don’t conclude. Anyone who was quaking in their boots about having missed the first leg up in equities should buy some now that they are being presented with a redo. Or stop always giving up trade location by chasing the market after every nice-sized move. It’s way too early to let yourself be psyched out by a little volatility.
I doubt there are any medium-term, or longer-term, quantitative models that have been overly concerned by this price action. Nothing that has happened so far will affect their asset allocation recommendations. Of course, their human masters might be tempted to meddle. This is important to remember. The models were probably happy, from a risk-forecasting perspective, with their positions at year-end and remain willing to stay the course. They just don’t try to sell the highs or buy the lows.
Crucially, it will take a lot to get them to bail on a global lower-for-longer rate environment. And why, if and when that really does change, it will be such a big deal. Speeches and analyst notes notwithstanding. The presumption is, if a central bank does something, it is more likely to do the same thing again the next time. Economists tend to do the same thing. They are playing the odds. And portfolios, lots of big ones, are structured to reflect that fact.
This is why, for all our understandable interest in stocks and the dollar, at the end of the day, it’s rates that will be the ultimate arbiter of where things go.
Fri, 01/03/2020 – 08:15
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