Something Strange Is Going On: As Stocks Soar, Mood Worsens

Via Bloomberg's Richard Breslow,

It isn’t an easy environment for making predictions about where markets will be headed. The S&P 500 made a new year-to-date high Thursday, and bonds are rallying, too. The dollar is confounding its critics and is bid. According to the financial conditions indexes, it is time to bring out the checkbooks. Things must be very good indeed. Yet, it all feels terribly depressing.

The Fed’s downside surprise hasn’t been ameliorated in traders’ psyches by assurances that the economy is in a good place. People mostly came out of it wondering what the Committee now knows, rather than that they are exhibiting an abundance of caution. And speculation about just how much difficulty they suddenly perceive about the balance sheet run-off is rife. Put that down to mismanaged expectations about autopilots and watching paint dry.

And if you remain in the green-shoots camp about the rest of the world, the news from overseas since the Fed meeting isn’t going to reinforce optimism going into the weekend.

  • The national CPI miss out of Japan showed that the country is getting no closer in reaching its inflation target. When the core measure reached 1% last year, there was a lot of excitement. Not so much this year, as the numbers look moribund. Hoping that next week’s Tokyo CPI will paint a better picture is true and overly optimistic. And watching 10-year JGB yields print at their lowest level since October 2016, doesn’t exactly suggest fears of price pressures. Bring on the sales tax increase.

  • Far more disconcerting have been the just released PMI data from the euro zone. Lovers of the euro, courtesy of some economic surprise index, should figure in the misses from France, Germany and the bloc as a whole. I smiled when I heard someone say, the German and French numbers may have been really sour but things are looking up in the services sector outside of the core.

Watching bunds trade at zero yield hasn’t bolstered the case that things are better than they look.

And if I was trying to console myself that today has just been an unfortunate snapshot of things going into the weekend, the comments from SNB Governing Board member Andrea Maechler that inflation could turn negative again offer a reality check.

But from a trading perspective, as I watch equity futures start the day under a bit of pressure, one thing to consider is Maechler’s remark that the central bank has become “a very large investor” in global equities and corporate bonds. I guess owning shares in over 6,000 companies qualifies. It doesn’t make it better from a moral hazard perspective that they eschew bank stocks.

Private portfolio managers may be struggling to get on board with the fantastic run in stocks this year but not the government entities. It makes it easier to understand buying the dip. And if you would like to think they behave vastly differently than other portfolio managers, the answer to a question about ethical investing was, “we cannot be standards setters.”

It’s unclear if this is going to be a long or a short day for traders. It feels like the former is hoped for and the latter is what will be on offer. Given the risk-off sentiment, keep a close eye on the very crowded emerging-market sector. Their equities are holding in quite well, but currencies look shaky. The best bellwether out there is the Mexican peso which after breaking higher Wednesday is threatening to give it all back. Against the dollar, 19.00 is a big pivot and much above it risks a squeeze.

For the dollar in general, Wednesday’s pre-FOMC highs for both the Bloomberg Dollar Index and DXY are close short-term barometers of sentiment. Avoiding getting caught up in Brexit news makes this all tricky, however.

Bonds look like there are insatiable buyers stopping out whoever is still short out there.

Continue to watch foreign bond yields as a guide for Treasuries. Long-term charts are beginning to look as directional as the shorter ones.