Price Action

In almost every asset class, volatility has made a phoenix-like return in the last few days/weeks and while equity markets tumbled Friday into month-end, the bigger context is still up, up, and away (and down and down for bonds). From disinflationary signals to emerging market outflows and from fixed income market developments to margin, leverage, and valuations, here is the 'you are here' map for the month ahead.

Turd Ferguson, of the TF Metals Report, does superb work and commentary on the precious metals markets. His latest analysis on Friday’s Commitment of Traders Report caught my attention for a number of reasons, in addition to it being so well done.

At the height of the financial crisis (i.e. 2008) it was easy to despise just the bankers for their serial and colossal ineptitude and rank hypocrisy. Now, five years into one of history’s most alarming bubbles, it’s easy to despise just about everyone in a position of financial or political authority, and for the same reasons. The real black comedy lies in the manipulation of market prices that is now endemic throughout the global financial system. As Japan is now showing, even with the unrestrained commitment of a central bank and its magical powers to create money out of nothing, there are practical limits to market rigging activity. Last week’s price action within the Japanese government bond market and stock market suggests that both of these markets are in the early stages of shaking themselves to pieces. The fallout of unintended (counter-intended ?) consequences from massive market manipulation will be awesome.

As the markets elevate higher on the back of the global central bank interventions it is important to keep in context the historical tendencies of the markets over time. Here we are once again with markets, driven by inflows of liquidity from Central Banks, hitting all-time highs. Of course, the chorus of justifications have come to the forefront as to why "this time is different." The current level of overbought conditions, combined with extreme complacency, in the market leave unwitting investors in danger of a more severe correction than currently anticipated. There is virtually no “bullish” argument that will withstand real scrutiny. Yield analysis is flawed because of the artificial interest rate suppression. It is the same for equity risk premium analysis. However, because the optimistic analysis supports the underlying psychological greed - all real scrutiny that would reveal evidence to contrary is dismissed. However, it is "willful blindness" that eventually leads to a dislocation in the markets. In this regard let's review the three most common arguments used to support the current market exuberance.

For all the grief BitCoin (and so often gold and silver) get during times of excess volatility, especially by those Keynesian prophets who urge everyone to adopt the one true FIATH and put all their cash in stocks (and more please: just use margin) we hear precious little about the ridiculous volatility farce that nationalized mortgage lender Fannie Mae has become: from opening above $4, trading up to $5.50, and now plunging to under $3.00, the stock is nothing but concentrated heatmap of every E*trade momentum chasing baby and dart-throwing monkey in the world (ignoring the fact that all "swing traders" merely respond to "price action" whatever that means and are thus all making money, no matter what happens). As for the fact that the swing in the stock price in the past hour wiped out nearly $15 billion in market cap, or nearly half of the total, on absolute no news (which is also substantially larger than the entire BitCoin market) well... we'll just leave it at that.

The last week has seen quite dramatic drops in the prices of a little-discussed but oh-so-critical asset-class in the last housing bubble's 'pop'. Having just crossed above 'Lehman' levels, ABX (residential) and CMBX (commercial) credit indices have seen their biggest weekly drop in 20 months as both rates and credit concerns appear to be on the rise. Perhaps it is this price action that has spooked Fitch's structured products team, or simply the un-sustainability (as we discussed here, here and here most recently) that has the ratings agency on the defensive, noting that, "the recent home price gains recorded in several residential markets are outpacing improvements in fundamentals and could stall or possibly reverse." Simply put, "demand is artificially high... and supply is artificially low."

UPDATE: As if by magic, the 'spike' lower has been fully retraced with a 'spike' higher. Of course, in the preceding sentence one should replace "magic" with a selling algo suddenly taking out the bid stack simple because it is programmed to do so, only for another algo to step in and try to make the entire move less obvious, in the process showing just how much of a farce price discovery in paper gold has become...

With markets quiet, what better time than now to smash the 'price' of spot gold lower than the moment US futures close and all that is left are a few Spot FX traders. Of course this makes perfect sense for any 'rational' bullion seller looking to unwind a position (or even a short looking to set out a decent trade) - wait until there is no liquidity so that your price action culls the order book and leaves you with anything but 'best execution' - but then again, when you don't have to worry about MtM, that doesn't matter. It seems that while the volume cat's away, the gold manipulators will play...

Price action in the foreign exchange market.  Discuss.

In an age of economic policy activism, including widespread quantitative easing and associated purchases of bonds and other assets, Amphora's John Butler reminds us that it is perhaps easy to forget that foreign exchange intervention has always been and remains an important economic policy tool. Recently, for example, Japan, Switzerland and New Zealand have openly intervened to weaken their currencies and several other countries have expressed a desire for some degree of currency weakness. In this report, Butler summarizes the goals and methods of foreign exchange intervention and places today’s policies in their historical context; but moreover he discusses the evidence of where covert intervention - quite common historically - might possibly be taking place: perhaps where you would least expect it... And if the currency wars continue to escalate as they have of late, it seems reasonable to expect that covert interventions will grow in size, scope and frequency.

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous. This can be summarized in one sentence:  How could this be happening again so soon?

Chaos Theory turns 50 years old this year, celebrating half a century of flapping butterfly wings in Brazil creating tornadoes in Texas.  That most famous example is especially appropriate, since it was a meteorologist named Edward Lorenz who first outlined why seemingly consistent and knowable systems can still go wildly wrong.  As it turns out, as ConvergEx's Nick Colas reminds us, small errors in measurement or observation at the start of a time series can significantly change how things look at the end.  In the current low volatility, one-variable central bank driven global equity markets, Chaos Theory may seem a quaint relic of past crises.  However, its central lesson – that complex interrelated systems create unexpected outcomes from seemingly benign inputs – is still relevant.  Students of economics like to think of their discipline as scientific, just like physics or other hard sciences.  They would do well to embrace the intellectual honesty neatly encapsulated by the central lessons of Chaos Theory. The problem is that current market price action - that slow steady grind higher - indicates marginal buyers don’t fret very much about the future.  No matter how little we really know about it.

A look mostly at prices in the currency market and the outlook.   

Despite (or in fact 'due to' in this alice-through-the-looking-glass market) terrible data overnight in Europe and weak data this morning in the US, equities went from strength to strength thanks to a pre-European POMO vertical liftathon that pulled equities 1% higher on nothing (nothing at all). This faded but was helped into the close by a JPY-driven spurt to hold above 1650 in the S&P 500 at another all-time high (intraday) and close. Behind the scenes it was a mess though. Treasuries rallied (after recoupling with stocks) and did not play in the final hour frolicking. VIX ended the day higher (and notably divergent). High-yield credit closed weaker and credit markets are significantly divergent now as releveraging begins to bite. The USD pushed on to new highs intraday (highest since July 2010) which we are sure will help earnings. While the market has done its best to pressure the oil markets lower, today saw WTI gush higher back over $94 once again. The big story is in gold and silver which were jerked lower at around the US open (ending the day down 3.8% and 5.6% respectively on the week). As a reminder for those calling for the death of gold - AAPL is down over 8% in the last 3 days (the death of AAPL?).

So much for Europe's "recovery." In a quarter when the whisper was that some upside surprise would come out of Europe, the biggest overnight data releases, European standalone and consolidated GDPs were yet another flop, missing across the board from Germany (+0.1%, Exp. 0.3%), to France (-0.2%, Exp. 0.1%), to Italy (-0.5%, Exp. -0.4%), and to the entire Eurozone (-0.2%, Exp. 0.1%), As SocGen recapped, the first estimate of eurozone Q1 GDP comes in at -0.2% qoq, below consensus of a 0.1% drop. The economy shrank by 1.0% yoy, the worst rate since Dec-09. The decline of 0.5% qoq in Italy means that the economy has been in recession continuously since Q4-11. A 0.2% qoq drop in France means the economy has ‘double-dipped’, posting a second back-to-back drop in GDP since Q4-08. The increase of 0.1% qoq in Germany was disappointing and shows the economy is not in a position to support demand in the weaker member states (table below shows %q/q changes).

The overnight economic data dump started in China, where both exports and imports rose more than expected, at 14.7% and 16.8% respectively, on expectations of a 9.2% and 13% rise. The result was a trade surplus of $18.16 billion versus expectations of $16.15 billion. The only problem with the data is that as always, but especially in the past few months, it continued to be completely made up as SocGen analysts, and others, pointed out. The good data continued into the European trading session, where moments ago German Industrial Production rose 1.2% despite expectations of a -0.1% drop, up from 0.6% and the best print since March 2012. The followed yesterday's better than expected factory orders data, which also came at the best level since October. Whether this data too was made up, remains unknown, but it is clear that Germany will do everything it can to telegraph its economic contraction is not accelerating. It also means that any concerns of an imminent ECB rate cut, or a negative deposit rate, are likely overblown for the time being, as reflected in the kneejerk jump in the EURUSD higher.