It’s a confusing time in which to trade. There’s little question about that.
Nothing seems to make much sense and for those of us who write about markets from a cynical point of view, that’s actually a good thing. Because when no one can figure out what the fuck is going on by reference to anything that’s some semblance of rational, people start looking to people who are ostensibly irrational for answers.
Why have the two “sure bet” trades of 2017 (long USD and short USTs) gone so horribly wrong?
Why are emerging markets still performing despite Fed policy normalization, episodic turmoil in commodities, tightening in China, and a burgeoning corruption scandal in Latin America’s most important economy?
What exactly is China doing over there?
Why, if the data is good and populism is on the back foot, does Mario Draghi continue to insist that accommodative policy is still necessary?
None of this makes much sense, and here to try and help you sort through it all is former FX trader Richard Breslow.
We had a right to expect more clarity on economic policy, geopolitics and just about everything else. But it seems that not only are juries all over the world still out, it’s not even clear what they need to be resolving. The market debate isn’t focused on where and how fast things are likely to go. That we know how to handle. It’s a comfort zone we retreat to. But increasingly, we’re struggling with, or ignoring out of frustration, questions of why things are even happening. How come inflation is doing what it’s doing? Why can’t bond yields rise? Are there bubbles everywhere or is everything priced to perfection? And on and on.
- If I had told you months ago that central banks would be talking about stronger economies, reduced headwinds and policy normalization, we’d have surmised that the numbers must be painting an unambiguously rosy picture. And that classic economic theory was once again asserting itself. But we know that isn’t the case. And to be truthful, no one really knows if it ever will
- The Fed’s on a tightening course, but feels compelled to calm our nerves, whether needed or not, at every turn. And every time they assure us that nothing can go wrong, the FRA/OIS spread narrows and 10-year Treasury yields swoon. You have to hope and pray that they don’t believe it and have a better Plan B than running for the hills
- The ECB, in their own way, is just as bad. Everything is great, forecasts must be raised, but extreme measures must continue without interruption. And love the euro, just not too much. The poor BOJ seems to provoke haven yen buying whenever they reiterate that quantitative manipulation will continue until an inflation goal that has been forever elusive is reached. And no one is exactly sure what the PBOC is up to beyond the latest conspiracy theory
- So we function in a world where risk assets keep going up while we couch everything in risk-off terms. It’s not enough that our central bankers think they can play with our heads under the fiction that they are masters of nuance, we do it to ourselves
- If you’re going to trade this market, and keep your sanity, you should take these narratives with some poetic license. Allow yourself the willing suspension of disbelief. Although Samuel Taylor Coleridge undoubtedly would have wondered if the quality of central bank communication was worth it
- Equities are bid. Doesn’t matter why or the rights and wrongs of it. Want a close stop? Lean on support at 2400 in the S&P 500 to get an inexpensive look whether this latest push has legs. Save discussing dip-buying for when it becomes relevant again
- Can’t get your head around emerging market strength? Stop looking at individual basket cases and think of it as a broad asset class. The MSCI is right at 1600, which it has failed to break higher from multiple times. This level is the cheapest play out there. If you hate them, your stop is close enough to touch. If it breaks through, it’s achieved another milestone worthy of respect
- Bond yields are the widow-makers of the year. I guess if we’ve learned one lesson it’s that U.S. yields just can’t make sustainable moves higher with negative rates elsewhere. The spread trades are just too attractive. Breaking April’s lows would be huge. And until tens break above 2.43%, it’s all noise. That’s your range
- Trade oil at your own risk. No one has a convincing clue. But as long as moves above $50 in WTI are merely headline spikes, it’s not a compelling long-term bullish story
- The dollar is an emotional wreck. It’s going to have to make serious new ground, in either direction, to be in anything but a painful range. Politics is too much with it at the moment
- If you’re feeling at sea, just think of these tales as The Rime of the Ancient Mariner