Price Action

A technical look at the currencies.  The phase that has characterized the first few weeks of the year has ended and a new one has begun.

Pretty simple stuff!

It's that time again, when a largely random, statistically-sampled, weather-impacted, seasonally-adjusted, and finally goalseeked number, sets the mood in the market for the next month: we are talking of course about the "most important ever" once again non-farm payroll print, and to a lesser extent the unemployment rate which even the Fed has admitted is meaningless in a time when the participation rate is crashing (for the "philosophy" of why it is all the context that matters in reading the jobs report, see here). Adding to the confusion, or hilarity, or both, is that while everyone knows it snowed in December and January, Goldman now warns that... it may have been too hot! To wit: "We expect a weather-related boost to January payroll job growth because weather during the survey week itself - which we find is most relevant to a given month's payroll number - was unusually mild." In other words, if the number is abnormally good - don't assume more tapering, just blame it on the warm weather!

These distortions are now being corrected.

The biggest fear the market currently has is not the ongoing crisis in the Emerging Markets, not the suddenly slowing economy, not even China's credit bubble popping: it is that Bernanke's successor may have suddenly reverted to the "Old Normal" - a regime in which the Fed is not there to provide the training wheels should the S&P suffer a 5%, 10% or 20% (or more) drop. Whether such fears are warranted will be tested as soon as there is indeed a bear market plunge in stocks - the first in nearly three years (incidentally the topic of the Fed's lack of vacalty was covered in a recent Reuters article). So, assuming that indeed the most dramatic change in market dynamics in the past five years has taken place, how does one trade this new world which is so unfamiliar to so many of today's "younger" (and forgotten by many of the older) traders? And, more importantly, how does one look for the signs of a bottom: an Old Normal bottom that is. Courtesy of Convergex' Nicholas Colas, here is a reminder of what to look forward to, for those who are so inclined, to time the next market inflection point.

In the years since the Financial Crisis, major Central Banks have been engaged in incredible easing programs that included the injection of massive amounts of liquidity into the financial system. That liquidity, Citi notes, had to go somewhere, and in a search for yield, much of it went indiscriminately into Local Markets. So far, the exodus of money from Local Markets has been “tame” compared to previous EM crises and it has also been selective since countries with weaker economies and foreign reserves have been the ones taking the largest hits. However, as Citi warns, our bias is that this is just the beginning.

Equities have the worst day of the year and really no exchange around the globe was left out. Now every one on our screen is down YTD. For US markets, today was the worst day since last June. Overall, while today was active, it was still an orderly session. We did have some interest to buy topside options... Serious pain in risk assets lent a bid to US treasuries as yields continue to retreat from their New Years’ day highs.

Across the spectrum of the US, Europe and Japan we have seen we see many stock markets that are “bending” towards pivotal supports and, Citi's FX Technicals group notes, A break below these supports, if seen, would suggest that we could see much more significant corrections lower across the board - "Any which way you look at it this market has a lot of potentially concerning developments but all the 'bricks' have not yet quite fallen into place here." However, as they add, VIX is showing such as move that "if seen" would almost certainly suggest a high to low move in the S&P of "double digit percentages."

Despite all the problems discussed here at ZH, the US dollar has is staging a come back.  Read about where it may go in the period ahead.  

The Fed tightens by a little (sorry, tapering - flow - is and always will be tightening): markets soar; Turkey tightens by a lot: markets soar. If only it was that easy everyone would tighten. Only it never is. Which is why as we just reported, the initial euphoria in Turkey is long gone and the Turkish Lira is basically at pre-announcement levels, only now the government has a furious, and loan-challenged population to deal with, not to mention an economy which has just ground to a halt. Anyway, good luck - other EMs already faded, including the ZAR which many are speculating could be the next Turkey, and certainly the USDJPY which sent futures soaring last night, only to fade all gains as well and bring equities down with it.

"... either way 2014 is already proving to be more challenging, more volatile, more illiquid and more bearish than the significantly bullish positioning and sentiment indicators warranted as we came into this year, and way more bearish than the enormously bullish consensus emanating from the sell-side. We will see painful counter-trend rallies, perhaps even to marginal new highs (3A above) – never underestimate the willingness and ability of central bankers to persist with flawed policies – but overall I think the end of the post-2009 QE-driven bull is at hand (or very soon to be at hand) and the onset of the next significant (post-QE) deflationary bear market, which I think will run deep into 2015, should now begin to guide all investment decisions." - Bob Janjuah

FX markets featured significant volatility in the past week, though the driver of that volatility was a combination of several idiosyncratic factors, rather than a core underlying narrative.  Widespread risk aversion and position unwinds dominated market trading with China PMI, weak US earnings, and BoJ un-dovishness cited among more systemic factors. Turkey and Argentina (among others) have more idiosyncratic risks (and limits approaching) but as Barclays notes, market positioning has played a major role in the moves as market volatility appears to have been the straw that broke the carry-trade's back - for now... as EM currency returns have notably decoupled from moves in US rates.

Overview of forces impacting stocks, bonds and currencies.  

Overview of the price action in the foreign exchange market.  

Dick Clark didn't poll America to determine their taste in music. He told them their taste in music ... not directly, but by creating common knowledge — ideas that a crowd believes that the crowd believes. With the American Bandstand group dance staging and scripted questions, Clark allowed the TV audience to see a crowd of attractive young people act as if the music were popular. This is all it takes. Clark didn't have to force his preferred choice of popular culture on his audience like some centrally-planned Ministry of Culture. The TV audience chose it all on their own, thinking all along it was their choice! This is the power of the Emperor's New Clothes. This is the power of the sitcom laugh track and the live studio audience. This is the power of public coronations and executions. This is the power of Tahrir Square and Tiananmen Square. This is the power of the crowd seeing the crowd, and it is the most potent force in the social world.  It's certainly the most potent force in the social world of markets, and every Central Banker today is playing the Common Knowledge Game just as hard as Dick Clark ever did.