With volumes already sinking and liquidity disappearing ahead of tomorrow's Thanksgiving Day holiday in the US, markets are jittery at best and deadly to one's P&L at worst as the machines react to every headline with maximum pain.
And while today's 'sensitivity' is likely exaggerated, as former fund manager and FX trader Richard Breslow notes, "not all headlines are designed to hurt you" but all headlines are now market movers, no matter how repetitious, ridiculous, or right they may be.
Having been woken up by a wrong-number call a little before midnight and unable to fall back asleep, I can assure you I’ve read a lot overnight. And by far the smartest thing I saw was written by one of my own colleagues, Sunil Kesur. Simple, almost to the point of stating the obvious. And yet it captured something that has to be considered every time you pull the trigger on a trade. “Italian Bond Rally Subject to Headline Risk.”
Sadly that’s true not only in that particular case, but to a large extent everything in our trading universe.
It’s a fact of life and it is driving traders to despair. But it needn’t be all bad. And how markets react can provide valuable clues. No matter how firm your resolve to do your own homework and make your own decisions, you ignore them at your own peril. Many of the thunderbolts are patently ridiculous. Some end up being loud, but short-term, noise. And others have lasting effect on market sentiment. Even if you disagree with how they are being interpreted.
Early this morning, as if on cue, I’m not making this stuff up, there was a quick downdraft in the dollar index on a Fed-pause report. On par with the course, the story cited unidentified “senior people.” It’s a meaningless contribution to the rate debate but this doesn’t make it any less impactful on your P&L.
And I know what just played out in trading rooms all over Europe.
Those that were short dollars said, “Thank you very much I’m done.”
Those playing from the long-side had some more colorful words before declaring, “This is stupid. I’m done.”
And those with a somewhat longer perspective just said, “I can’t wait for these U.S. numbers to come out already so I can get out of here.”
Complete noise. Probably a gift of a fade opportunity or crying out to be ignored outright. But people are jittery. Particularly as they try to understand whether today’s equity bounce and rally in Italian assets means something more than a zag to yesterday’s zig.
Hope springs eternal and doesn’t it feel like the fear-versus-greed calculation is being re-evaluated. I’m at least open to that potentiality. Or maybe I’m just falling into a familiar trap. It’s like using an overbought RSI measure on the pace of bad news as a reason to be cautiously optimistic. Especially, because Brexit events and Sino/U.S. relations can easily take precedence if Italy decided to take a breather from the front pages. But the doom, gloom and apocalyptic warnings that we’ve been fed a steady diet of recently can easily turn 180-degrees around. Happens all the time. It’s just a matter of timing.
The ironic takeaway from the EU budget verdicts is the entire process is a mess, so that must be good, not bad for Italy. And BTPs are reflecting that. Headlines that “Italy Excessive Deficit Procedure” is warranted lost out to, “Belgium, France, Spain Risk Breaching Budget Rules.” That’s a strong indication of today’s mood.
I love finding a trend as much as anyone. But extrapolating events way out into the future based on confusion is a dangerous practice. I would urge being very open-minded. Sometimes those annoying headlines actually can tell you something valuable.