Via Bloomberg's Richard Breslow,
This is take-no-prisoners time for the markets...
Before I tell you my latest theory, it’s worth mentioning this hasn’t been a normal day. Because in many ways, despite holidays in China, Hong Kong and Australia, along with storms besetting Japan and the aftermath of the natural disasters in Indonesia sounding worse with every update, it has, in many ways, been a very normal day.
Ordinarily, with all that is going on in Asia, I would have forced myself to, mostly, ignore the early price action as unrepresentative. But between a healthy amount of news, a host of economic numbers and the reality of it being the first day of the year’s last quarter, volumes have been very robust. And that’s seen in all the right places, where real or hoped for new developments are being debated.
Volumes in U.S Treasury, S&P 500, bund and BTP futures are all running well above average. And while I could quibble with the magnitude of some moves, there isn’t anything that stands out as a stinker of an idea. Maybe not what I’d be doing, but well within the realm of reasonableness.
While some of the early buoyancy of Asian currencies ended with a mostly flat close, Europe is trying to put a bravely positive spin to things. Hope does spring eternal. And I’d be loathe to pull out my extrapolating calculator. But traders are being a little more clever than it looks on the face of things. While Italian equities are up and BTPs are trying to stabilize, calls on the German Schatz -- the most straightforward hedge for Italian troubles -- continue to be bought in size... As they were during the worst of Friday’s panic.
I’ve noticed a strange dynamic when talking to traders...
When European assets go down, no one professes to believe anything being officially said.
But when traders want to buy, they seem to be willing to take everything at face value.
So much for having perspective. Or maybe just weighing what price level will set the ECB into “whatever it takes” mode.
On the week, obviously Italy and U.K. news will dominate early. No one, but me, seems to have put the latest Catalonia protests nor the Bavarian elections in two-weeks time back on their radar screens. Trade and diplomatic tensions with China have been short-sightedly pushed off the page by USMCA.
But that aside, and some global meh numbers over the weekend and today, sovereign yields are very much in play. For whatever it’s worth, I cite support and resistance levels and get back, “Yes but where will they go when they break higher”? This is going to be a major theme that could carry through for the whole of the quarter.
And now my theory for understanding price action for the quarter.
Hedge funds are once again under-performing their benchmarks. The HFR indexes don’t make for pretty reading. There has been a lot of speculation that realized volatility will be headed higher. I think that’s correct because this is the last gasp to salvage a lot of people’s years and that makes for manic market chasing, back and forth. It’s a very difficult period to keep any powder dry and the appetite for losses will be extremely low.
Imagine the agony of walking in and seeing the S&P futures up over one-half percent. The dollar is torturing people. The Bloomberg Commodity Index is up hard on a move I’m not sure a lot of people caught. And bond yields are a tough way to make money fast.