Authored by Richard Breslow via Bloomberg,
The Day Before a Big Event Is Hardest to Trade
The European PMIs that were released earlier today beat forecasts. And it felt positively quaint when the euro and bund yields rose to their respective highs of the day. If that is all it takes to change the mood, then economists should be enlisted to keep low-balling any economic estimates. Algorithms can be forgiven for reacting to the prints. No human trader should have been doing anything else besides fading the move for better intraday trade location.
That’s harsh. But it reflects two realities.
The market fully expects central banks to be dovish.
And the market is relying on that fact for its investing thesis.
Yet deep down inside, investors worry, probably even know, that further monetary policy stimulus will be of dubious value in actually getting the global economy moving at a quicker pace. Expensive money is not what ails us.
Trading volumes remain, understandably, very low. Earlier in the week, that didn’t mean there weren’t things to be learned from the price action. Whatever today brings should probably be taken with a little bit more wariness. Traders have a tendency to talk themselves into all sorts of notions when the event they have been preparing for suddenly looms.
A few days ago, everyone was sure exactly what Fed Chairman Jerome Powell was going to say and what the central banks were going to do. Today will be about traders torturing themselves by questioning those assumptions. Whether they have been right or wrong in formulating their expectations, nothing in Wednesday’s Fed minutes nor this morning’s PMIs will change what ends up happening in September.
Having said that, the short end of the Treasury curve is probably right in being just a little bit more circumspect about pricing beyond next month. Emphasis on the word “just.” There has been a lot built into expectations that go well beyond data-dependence. And there are plenty of domestic and international challenges that are very much known unknowns. Some of which, it would seem, can change on a whim or political expediency.
Whatever path markets take to get there, they have confidently assumed that the central banks are very focused on asset prices and will try to maintain their buoyancy. That will get harder to accomplish over time. But timing is everything.
The euro is the most interesting currency trade of the day. It needs to start holding up for more than short bursts of time or risks taking a new look at year-to-date lows. I guess it will wait until after the G-7 to decide what it is going to do. But it is really just hanging on. It seems even more in play than the dollar, which refuses to break out higher but also doesn’t back off. It’s becoming a frustrating exercise to trade. The yen is also worth keeping a close eye on. It’s hard to find anyone who isn’t bullish on it, which raises the question, why isn’t USD/JPY lower? Maybe it, rather than the euro, will decide which way the dollar indexes end up going.
If looking for a canary in the coal mine, given all of the interest-rate assumptions that current market pricing is based on, watch gold.
It keeps looking longingly at its support zone, which isn’t something one would normally expect with everything else going on.