With the algos anxiously buying the f**king dip into the US open this morning, to convince the world that the Saudi threats are a storm in a teacup, you could be forgiven for thinking that last week's bloodbathery is behind us and we're back to the teflon bull market... until the cash open and everything tumbled...
And while nothing in the news suggests that should be so ebullient, former fund manager and FX trader Richard Breslow notes that the market has an optimistic feel to it. Despite the facts that the news from Brexit to Saudi Arabia isn’t exactly bubbly; that traditional havens like the Swiss franc and the yen are bid; that U.S. equity futures have been down all night; and amid warnings of downside risks to the global economy were the norm at the IMF meetings in Bali - Breslow notes that unlike last week, it just doesn’t feel scary this morning, adding that "I’m pretty sure this is so for all the wrong reasons."
Friday’s last minute ramp-up in share prices didn’t set the stage for today. Certainly Asian equities weren’t impressed. But markets are taking a somewhat troubling, yet sadly understandable, comfort in the fact that global bond yields, most notably Treasuries and bunds, have ceded all of their recent momentum higher and the dollar is acting lackluster despite having all sorts of reasons to be pushing higher. Traders are also realizing that while the S&P 500 futures might be cracking the 200-day moving average, they still have the equally important 55-week level right below. And, so far, it has withstood some heavy strain.
There is very little to suggest that the increase in official global rates or balance sheet reductions will be stalled. Certainly nothing in the numbers or speeches to make one expect that should be anyone’s base case. But it feels like the idea is being entertained in the back of peoples’ minds. Sometimes it is just too much to expect that all of the news flow can be totally ignored.
We all love a good canary in the coal mine story. Have you noticed how gold has been behaving? Not only has it broken out higher from its recent mind-numbing range, but has had the courtesy of leaping right up to very important resistance. Which makes it not only in play but interestingly so. Whether you look at last December’s low, August’s highs or significant retracement levels, where it goes from here will be a good indicator of rate and dollar expectations.
The 10-year Treasury also sits at a crossroads. The yield can sag a little further without completely discrediting the higher rates story. But I wonder. Current levels around 3.15% are more important than the charts might otherwise suggest. This is one of those rare situations when sinking toward important technical levels between 3.08%-3.04% may be a sign that it is an opportunity you might want to think twice about taking. Frankly, I’d rather sell here than at those better levels.
The same can be said about the dollar. Everything economic suggests that it is a buy. But it trades poorly. Some have explained the lackluster performance as showing that a lot of good news is already priced in. I don’t see it that way. Investors, and reserve managers, are increasingly asking if enough bad news is priced in. It’s not a good thing when an ultimate safe haven doesn’t act the part. Having said that, I’d still rather take a shot here than at cheaper levels. I’m pretty sure I can define my stops with greater accuracy because this very much feels like make-or-break territory.
A lot of assets have disappointed those basking in their recent trading patterns. I’m not quite ready to give up on them yet. But if there appears any danger that bad news is becoming good news again, than an entire rethink would be required.