When many American traders went to bed last night, China was tumbling, the euro was in trouble, and US equity futures were notching lower. Then, as former fund manager Richard Breslow scoffs, it appears the world "reconsidered" and everything rallied to erase any sign of discontent or uncertainty by the time everyone woke up...
Apparently, the word of the day is “reconsider.”
Across a whole host of assets, we got somewhat violent moves early in the 24-hour trading cycle that managed to unwind themselves over the course of the day.
I kept being told that the euro, Chinese equities, U.S. equity futures, gold, bond yields, Eurostoxx 50, and so on, all reversed their opening, sometimes gap, moves after the market reconsidered what it all meant.
Of course, that’s being a bit too kind. It would be more accurate to say things turned around when traders actually considered things for the first time. But this all matters more than just a collection of knee-jerk reactions that have come to naught as another trading region came in.
North America isn’t being asked to break the tie and decide who was right. They are being told that they can afford to ignore the news that propelled things in the first place. After all, we’re right back where we started. No harm, no foul. That would be a mistake, as once again we keep muddling-up short-term and long-term information as if they should be discounted by the same rate and assuming we should trade without benefit of context.
Chinese equities opened lower leaving gaps from last Friday’s close.
Big swings: the Shenzhen dropped a quick 2.1% before staging a relentless rally throughout the day to finish up by 0.9%. No leap on the close, just a steady rally.
The commentary at the lows was as dire as the dismissive tone was at the close.
The PBOC proposed additional regulations to curb the run-away shadow banking industry. What was described in the morning as policies that would cause a flood of outflows from various short-term investments were later described as likely to attract foreign inflows. Wait, we’re not collapsing through the last lines of support any more? What a gift -- buy!
The message from this is that, once again, the PBOC is delivering on what they have warned about and promised to address. Perhaps instead of trying to deconstruct the “real” Chinese intentions based on outmoded epigrams, we should start to listen to what they’re actually saying. And accept that regulation isn’t bad by definition. Sometimes a healthier Main Street can actually be good for equities--the old-fashioned way. But it would be folly to decide these new regulations must not be all important because of the day’s price action.
European shares and the euro were hit early on the German coalition talks collapse.
What began as “markets are being roiled” quickly turned to markets “shrugged it off.” Hardly. They recovered on the very fortuitously timed announcement that Volkswagen was going to spend an additional EU25B over the next five years on its core brand. That’s hard and good news. May even help out with Germany’s hopelessly flat Phillips curve.
But don’t think, Chancellor Merkel on her back foot isn’t something with negative possibilities that make it foolish to dismiss. Just hard to enumerate the immediate implications.
As Breslow concludes, the mirage of markets' ignorance does not mean anything is solved.
Some of the other realities to keep factoring into your analysis and avoid being lulled into ignoring include:
- Brexit wasn’t solved because today’s headline was upbeat, it’s serial noise;
- you’ve no way of handicapping Nafta as each debating point is aired;
- no one has a firm handle on the Middle-East;
- and U.S. tax reform may end up just stoking the debate of whether a bad deal is better than no deal.
Don’t ever let someone tell you the really big news is the ones you can afford to ignore
And it appears we're gonna need more 'help'...