What if the bounce is over?
That’s something nobody really wants to comprehend, with market participants still high off Monday’s best-since-2009 Dow surge, a 5% upside explosion the likes of which hasn’t been seen in a decade. The RBA delivered a rate cut Tuesday and the BoJ is apparently prepared to show its resolve too.
You could have cited any number of factors for the afternoon acceleration into a rising tape on Wall Street to start the week (some suggested Amy Klobuchar’s decision to end her bid for the Democratic nomination and endorse Joe Biden helped, and it looked as though the last hour finally saw a rotation out of bonds and into equities, after yields touched absurd levels earlier in the session), but the celebratory mood was fundamentally predicated on hopes for a coordinated policy response, stoked by news of a Tuesday teleconference with G-7 finance ministers and central bankers. It will reportedly be overseen by Jerome Powell and Steve Mnuchin.
Read more: A (Dove’s) Wing And A Prayer.
But if Monday’s surge was predicated on the forthcoming call (as well as rhetoric from the BOJ, BOE and ECB), then that by definition means the event itself has the potential to turn into a “sell-the-news” moment. Because the “rumor” was damn sure “bought”.
As crazy as this seems, we have, after Monday, recouped a large chunk of the losses since the February 19 peak.
Of course, one can’t underestimate the possibility that, as volatility falls and spot surges back up through key levels, deleveraging from the vol.-targeting crowd abates and CTAs begin to re-risk.
And lord knows there are hordes of retail investors probably champing at the bit to get a piece of the dip-buying action on the assumption that Pavlov (i.e., the classical conditioning deeply ingrained in the post-crisis years) ain’t dead yet.
Still, some say it might be time to take profits on the bounce and await further information.
“We believe investors should take profits as soon as possible”, JonesTrading’s Mike O’Rourke (who recommended buying ahead of potential policy action on Friday) said, in an evening note.
After recapping the Monday surge, he suggests what you see in the first chart above “is as sharp of a rebound as anyone could hope for in such a short period of time”.
Needless to say, that doesn’t mean frantic traders (carbon-based or otherwise) won’t use tomorrow’s teleconference as an excuse to buy more, but O’Rourke suggests any “ensuing gap higher in the equity market would be a selling opportunity”.
Incidentally, this is the subject of Bloomberg MLIV’s “Question of the Day”. To wit, from Mark Cranfield:
How far can global stocks rally with coordinated G-7 action? The world’s top finance ministers will lead a global teleconference on Tuesday to discuss their response to the economic threat posed by the coronavirus. But how sustainable is the boost for global stocks?
Not very, according to skeptics. AxiCorp’s Stephen Innes neatly encapsulates the counterpoints to the notion that coordinated easing is the solution.
“Some commentators have been questioning whether monetary policy can be helpful, primarily focusing on two rhetorical questions: 1) How does a rate cut relieve a global supply shock? And: 2) Will rate cuts boost the service economy and get people back on airplanes to Milan and cruise ships from Venice port to St Marks harbor?”, he asks, on your behalf.
The answer is “probably not”, but Innes notes that “the market meltdown last week risked spiraling out of control [and] central banks can stop such spirals… merely by hinting at [easing]”.
Whether or not it’s healthy to encourage more speculation with markets still arguably stretched even after last week’s abominable trade is another matter.
How does money stimulate something that is shut down? And at what point of the unfolding of Trump trade disruption are we? Supply chains do not reconfigure instantly.
Are you saying 25 basis points won’t get you on a cruise ship? Maybe 50?
“But if Monday’s surge was predicated on the forthcoming call (as well as rhetoric from the BOJ, BOE and ECB), then that by definition means the event itself has the potential to turn into a “sell-the-news” moment. Because the “rumor” was damn sure “bought”.”
No one particularly wanted the dollar moving higher and global central banks have just been given an excuse to do something about it. Trump’s weaker dollar objectives may well be fulfilled. Given Trump’s extreme nature, I wouldn’t be surprised if Tuesday brings a market infused with the ‘expectation’ of persistent future coordinated monetary actions. I really don’t see a sell the news type event, given the Pavlovian ‘buy the dip’ mentality hammered into the equity markets.
Why bother to have a global coordinated monetary action if you expect the equity markets to go down? Investors just need to be given a reason not to sell.
That was seriously weak policy action this morning. O.k, now the market has an excuse to sell the current bounce. The central banks can only react to a crisis, they can’t prevent it. My hopes were far too high for a bunch of appointed civil servants.
This is for sure sell the news. Peel back virus headlines and look at the Econ data. Does anyone honestly expect equities to maintain stretched valuations through a global recession? Not a chance.
Well, I hope he took his profits around 10am this morning….