Breslow: "What We've Seen So Far This Week Has Been A Gap Repricing Without Any Price Discovery"

Yesterday, Bloomberg's Richard Breslow expressed surprise at the exuberant market euphoria that resulted from a French election outcome that was "everybody's base case." 24 hours later, his surprise remains and as he says in his latest daily note, "what I do question is why everyone keeps telling me this was their forecasted and most likely outcome, yet the world has changed." Maybe nothing Breslow answers, and muses that it is all just the market gaps without any actual price discovery:

What we’ve had so far this week, I know it’s only Tuesday, has been a repricing without the benefit of meaningful price discovery along the way. Gaps during the Asia-Pacific opening are one thing. Ones followed by flat-lined price action suggest order books emptied followed by “So what do we do now?” And if there isn’t a quick follow-through in momentum, the next question will be “What have we done?”

That, however would imply an inefficient market, and Breslow concedes as much: "Markets have proven they do a poor job of assessing political risk. Partially because it’s hard, the implications of outcomes often utterly unpredictable and, the dirty secret traders hate to admit, they sometimes prefer outcomes for others that, as citizens of that jurisdiction, they wouldn’t choose. Having said that, the “worst case” scenario that was avoided was never very likely."

Still, for those traders who trade volatility, don't despair: "The good news is so many assets stopped at or near important technical levels, which makes risk-reward really good for trading, no matter your view. Take what you can get"

True, it's just that with $18 trillion in central bank liquidity out there, most will take the upside as few shorts have been left standing after nearly a decade of central bank intervention.

Breslow's latest Trader's Note below.

Where to Should Be Preceded by Why We Are Here

 

The problem I have with the reaction to the first round of the French presidential vote isn’t from the immediate movements of the euro nor European peripheral spreads to Germany. They were meaningful, reflected a mixture of relief and illiquidity and broke no new ground. What I do question is why everyone keeps telling me this was their forecasted and most likely outcome, yet the world has changed. 

 

Of course, if that is true, then people offering advice should be a lot more humble and include many more caveats with their conviction-view prognoses. But is it really likely that the calculus has changed from Sunday to warrant EUR/USD now beginning an ascent to a level only seen at the height of the initial panic on the night of the U.S. election? And we know what ensued after that.

 

What we’ve had so far this week, I know it’s only Tuesday, has been a repricing without the benefit of meaningful price discovery along the way. Gaps during the Asia-Pacific opening are one thing. Ones followed by flat-lined price action suggest order books emptied followed by “So what do we do now?” And if there isn’t a quick follow-through in momentum, the next question will be “What have we done?”

 

Markets have proven they do a poor job of assessing political risk. Partially because it’s hard, the implications of outcomes often utterly unpredictable and, the dirty secret traders hate to admit, they sometimes prefer outcomes for others that, as citizens of that jurisdiction, they wouldn’t choose. Having said that, the “worst case” scenario that was avoided was never very likely.

 

And remember, when judging the global market reaction, there were about 12 hours from the election results before you could trade the assets most directly affected. That’s a lot of proxy hedging. Worth 30 big figures in USD/MXN?

 

The good news is so many assets stopped at or near important technical levels, which makes risk-reward really good for trading, no matter your view. Take what you can get

 

“Trader’s Notes” are authored by Richard Breslow, a former FX trader and fund manager who writes for Bloomberg.