Certain market realities were starkly exposed this week as a result of the China currency moves, Bloomberg’s Richard Breslow writes.
Carry positioners have/had enormous positions leaning on central banks despite obviously changing circumstances, equity investors remain long for the same reason and bond investors remain short their duration targets. What it implies is that the need to be fully invested continues to trump prudence, that the market thinks it will deal with rate hikes when they actually happen, and every curve ball will be seen and described as a black swan event.
As Keynes is supposed to have said, “When the facts change, I change my opinion. What do you do, Sir?” Yet markets have been lulled into relying on the belief that this is no longer the case, and even if it is, any change will be stage managed for the comfort of institutional money managers. Gone are the days when you had to guess at the Fed’s policy by interpreting weekly money-market operations. But that can’t be done in any practical sense.
- Keynes also argued that the world was an inherently unstable place and no central banker has perfect insight into the future. Saying the Fed is “data dependent” really means we have little faith in our forecasts and will move if and when it is a no brainer. It also says, as we have been so reminded of this week, that it is wrong to define “data” narrowly as only meaning economic reports. To the Fed, wrongly or rightly, data means all inputs from all comers.
- Yet again, just yesterday, the NY Fed’s Bill Dudley wouldn’t give a specific date for liftoff and said he doesn’t know when himself, even if the time is “certainly getting nearer.” He then spent quite a bit of time talking about China. But he does acknowledge that being able to raise rates is a good thing and a goal. So change with the circumstances.
EUR/CNH moved as much as 7.5% higher on the week as carry traders were being carried out on their shields. Panic buying led to destabilized price movements and cries of global disaster. I was rather reminded of what Otter told Flounder in one of the great quotes from Animal House, “You f&%*ed up, you trusted us.” Although Otter had far more reason to feel aggrieved. The EUR threatening breakout higher against the USD and GBP strikes me as laughable.
U.S. 10-year bond futures rocketing higher, despite the well repeated conclusion that last Friday’s NFP number was “good enough” for a Sept. liftoff, was also a sad reminder that these supposedly game-changing events have a very short shelf life as long as normalization remains a dream set somewhere in the future.
As for equity traders, the lesson once again has been shown to be: the 200-DMA is a line in the sand not a line drawn on a screen. The same was assumed of EUR/CHF at 1.2000 and USD/CNY at 6.2100.
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Today, as I write and equity markets are all in the green, I am curious to see if traders will take advantage of this get out of jail free card or declare that once again we have been shown that the status quo defeats the normal.
Source: Bloomberg
