On Monday, former FX trader turned Bloomberg contributor Richard Breslow said Friday’s action suggested traders had lost their confidence.
No longer are market participants looking to get the jump on their peers. Instead, everyone is waiting on someone else to set the narrative.
And understandably so. After all, we’ve gotten used to operating in an environment where the narrative, however many times it wobbled, was still the narrative. “Reflation” has been the story since November 9 and last Tuesday that narrative suffered a stroke. It subsequently died on Friday with the GOP health bill.
Monday was interesting not necessarily for how we closed but rather for how we opened. FX and rates told the story, equities followed but as usual, BTFD reasserted itself even though we still closed red. And as Breslow notes in Tuesday’s missive, there’s still a “the sky is falling” feel to things every time SPX is red.
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