It was just yesterday morning, when futures were tumbling during the year's worst pre-market selloff in the aftermath of Friday's GOP failure to repeal Obamacare, that Bloomberg's Richard Breslow wrote "traders have lost confidence in their ability to interpret what’s plainly market-moving news." He added that "far from hoping to be the first to trade, [traders] need someone else to commit and help create the narrative. No wonder so many funds are shuddering and then shuttering."
What a difference a day makes: with traders wondering on Monday morning if someone else would take the lead and BTD, the answer ended up being a resounding yes with the S&P wiping out a nearly 1% drop, to briefly trade in the green, as the VIX suffered one of its biggest intraday drops on record, the "narrative" was back and as SocGen's Kit Juckes noted overnight, "equity market participants have taken a look at the lower yields and weaker dollar and decided that since absurdly low rates are the elixir that the equity bull market lives on, they might as ‘buy the dip’ yet again.”
And yet, as Breslow follows up in his latest daily letter, there appears to be a shift in sentiment. As the former FX trader notes, "don’t let anyone try to tell you that stock-market pullbacks, including modest ones, are something investors and policy makers can now handle with aplomb. You can calculate financial-conditions indices with all sorts of back-fitted weightings but when stocks go down, everyone still goes into “The sky is falling” mode."
And therein lies the rub: whether it is central banks lifting offers, or risk-parity funds stepping in, or just algos frontrunning other confused algo orders, human traders are increasingly more nervous and frustrated by a market which is seemingly impervious to any adverse newsflow, and while they will gladly piggyback on the latest daily BTFD rally, when left on their own, and especially if selling resumes, the "panic" comes back. Which is why the Fed's renormalization path is so questionable: one miscalculation, one selloff, and the central bank will be right back at it, assuring a market of 20-some year old hedge fund managers there is nothing to worry about, and doing the occasional "Bullard QE4 jawboning" should the selling accelerate.
Meanwhile, the familiar divergence between equity and bond (and dollar) traders - for whom "the jury is still out" - has returned. Breslow explains why in his full note below:
You Can Still Learn From Forgone Opportunities
Well, we had some nice excitement yesterday and markets have been doing their best imitation of a weekend warrior only too happy to get safely back to the couch. There’s more of a mood of relief at dodging a bullet than self-examination of a pretty predictable trading opportunity forgone. But, as they say, lessons have been learned.
We now definitively know that little of the grand plans for a miraculous set of changes in U.S. policy will come easy. So we need to re-handicap them accordingly. Including the timing. Also recalibrate our thinking on which asset classes care more about which policies.
And don’t let anyone try to tell you that stock-market pullbacks, including modest ones, are something investors and policy makers can now handle with aplomb. You can calculate financial-conditions indices with all sorts of back-fitted weightings but when stocks go down, everyone still goes into “The sky is falling” mode.
There’s no shortage of Fed speakers for the balance of this week. Any of them willing to submit to Q&A should be asked how much and in what potential form fiscal stimulus figures into their forecasts. They like to say it doesn’t very much. But it’s in there somewhere, hard to believe anything else. And can’t not affect their assumptions for rate rises. Just how strong do they really think this and the global economy are on their lonesome? Frankly, it’s just not good enough to settle for we’ll see how things pan out.
Clearly dollar and bond traders think the jury is out. And want to see some infrastructure proposals. Equity traders are comfortable banking on deregulation and tax cuts. They have their own priorities. If the party in power needs a “win” that’s where the push will come from. And perhaps sooner than analysts expected, with health reform no longer standing in the way.
For currencies the best read on short-term attitudes remains USD/JPY. Using 111.70 as a pivot is as good as it gets for judging momentum. It’s clean and clear. If you insist on trading EUR/USD, use 1.0760. It’s close and will determine the mood. It’s more ambiguous because it will also hinge on how much fire Europeans are willing to play with talking about rate rises.
Gold didn’t make a new year-to-date high in yesterday’s panic. That remains in play and is close. For Treasuries, keep using 2.37% on a close as the pivot to judge just which range we are in.
Remember, equities remain, and will continue to do so, the ultimate sacred cow.