As regular readers are fully aware, former FX trader Richard Breslow writes some great commentary. And he does it daily. So he’s like Heisenberg.
Anyway, Breslow has an uncanny knack for summarizing what’s going on across assets in the space of 6-to-10 masterfully crafted bullet points and on Wednesday, he’s in rare form.
What you’ll read below captures everything we’ve been saying for the last two weeks and a whole hell of a lot more. From central banks suppressing volatility at the risk of magnifying the unknowable consequences, to the quandary of buoyant risk assets in the face of lackluster data in the US, to the strange solace traders are taking in the fact that Washington has returned to “business as usual” which is of course “no business at all,” to the black (err… “red”) box that is Chinese fiscal and monetary policy.
Read on as Breslow deftly navigates choppy, yet simultaneously calm, market waters…
Investors are suffering from the increasing amount of insider trading going on. Not the kind generated from golf course confidences or sifting through corporate dust bins, but from markets that just aren’t capable of trending. Because fewer and fewer market participants are comfortable answering the question, “What’s going on?”
- A lot of this is from the much-discussed volatility suppression caused by central banks. They got what they wanted and now the negative externalities they failed to appreciate are dangerously affecting accurate price discovery. When we need it most. In their biographies they claim exigent circumstances. History will say they got too enamored with the sway they held over markets and were having too much fun
- But none of this is new. We’ve entered a new phase where the questions traders must deal with are not as simple as how much more quantitative easing is there to be wrung out of the system. And traders simply don’t know what they want to do. The result being we get long periods of inside days following gap moves. And this is largely untradable, unless you dig noise. The big questions remain unanswered
- The U.S. is tightening but the numbers stink. Look through them or worry. Most people think the Fed will try to have their cake and eat it too at today’s meeting by saying yes to both. But what does it mean going forward? Student loans and car sales versus the next status symbol iPhone
- And let’s face it, no one has any idea what’s going on in Washington. Is it really comforting that ineptitude is giving markets solace?
- Europe has really turned the corner and the ECB may be forced to change tack? True in the aggregate, as long as you continue to define Europe as Germany. Want to get aggressive buying the euro when everyone acknowledges that the weak currency has been key to much of the economic recovery? Even a 20-point lead in French polls can’t seem to seal the deal for investors
- And I defy anyone to adequately and convincingly explain Chinese economic policies, let alone what zig or zag they’re likely to take in the next month. Have fun trading the Bloomberg commodities index based on the Sino narrative
- More dangerously, if less frustratingly, it sends false signals. The market creates a narrative around price levels that fails to take into account that many assets are where they are because it happens to be the place chance put them when they last stalled out
- Instead of asking yourself what does this price level mean, ponder the fact that it’s increasingly deja vu all over again. There has been plenty of news, but lets face it the S&P 500, like so many other assets, hasn’t done anything of significance in two months
- Emerging market currencies are doing great, but they, too, are right back where they were in mid-March. You would have had to be awfully good to anticipate the South Africa induced panic sell-off or the just as quick dip buying that brought us right back to where we started
- There’s a real crisis of confidence in where we’re going and who’s in charge. Until investors get a lot more comfortable in their outlook assume that prices, like your cigar, may just be what they are without a great underlying significance