Richard Breslow, the former FX trader and fund manager who writes for Bloomberg and frequently graces these pages, in his latest "trader's note" summarizes the sheer confusion that has gripped a directionless market, in which central banks have killed price discovery and where volatility appears to be an artefact of a long one past. Hardly anything new here, but a good summary of where the "market" finds itself on the day when the first 4x levereaged ETF was released.
His full note below:
Sometimes Prices, Like a Cigar, Are Just Prices
Investors are suffering from the increasing amount of insider trading going on. Not the kind generated from golf course confidences or sifting through corporate dust bins, but from markets that just aren’t capable of trending. Because fewer and fewer market participants are comfortable answering the question, “What’s going on?”
A lot of this is from the much-discussed volatility suppression caused by central banks. They got what they wanted and now the negative externalities they failed to appreciate are dangerously affecting accurate price discovery. When we need it most. In their biographies they claim exigent circumstances. History will say they got too enamored with the sway they held over markets and were having too much fun.
But none of this is new. We’ve entered a new phase where the questions traders must deal with are not as simple as how much more quantitative easing is there to be wrung out of the system. And traders simply don’t know what they want to do. The result being we get long periods of inside days following gap moves. And this is largely untradable, unless you dig noise. The big questions remain unanswered.
The U.S. is tightening but the numbers stink. Look through them or worry. Most people think the Fed will try to have their cake and eat it too at today’s meeting by saying yes to both. But what does it mean going forward? Student loans and car sales versus the next status symbol iPhone.
And let’s face it, no one has any idea what’s going on in Washington. Is it really comforting that ineptitude is giving markets solace?
Europe has really turned the corner and the ECB may be forced to change tack? True in the aggregate, as long as you continue to define Europe as Germany. Want to get aggressive buying the euro when everyone acknowledges that the weak currency has been key to much of the economic recovery? Even a 20-point lead in French polls can’t seem to seal the deal for investors.
And I defy anyone to adequately and convincingly explain Chinese economic policies, let alone what zig or zag they’re likely to take in the next month. Have fun trading the Bloomberg commodities index based on the Sino narrative.
More dangerously, if less frustratingly, it sends false signals. The market creates a narrative around price levels that fails to take into account that many assets are where they are because it happens to be the place chance put them when they last stalled out.
Instead of asking yourself what does this price level mean, ponder the fact that it’s increasingly deja vu all over again. There has been plenty of news, but lets face it the S&P 500, like so many other assets, hasn’t done anything of significance in two months.
Emerging market currencies are doing great, but they, too, are right back where they were in mid-March. You would have had to be awfully good to anticipate the South Africa induced panic sell-off or the just as quick dip buying that brought us right back to where we started.
There’s a real crisis of confidence in where we’re going and who’s in charge. Until investors get a lot more comfortable in their outlook assume that prices, like your cigar, may just be what they are without a great underlying significance.