Exciting, Dynamic, Price-Setting Mechanisms

Exciting, Dynamic, Price-Setting Mechanisms

Another session in paradise found US equities dawdling, or “chopping around,” if you prefer to conceptualize of markets as exciting, dynamic, price setting mechanisms, always hard at work matching buyers and sellers in the name of efficient capital allocation. (Insert sitcom laugh track.)

The S&P touched a new record “bolstered by earnings,” to quote somebody, although I’m not sure who. That’s just a generic bit of boilerplate copy that would fit right in at any mainstream media outlet.

“Regardless of the recent slow grind higher in US equities, the demand for downside rages on, with Put Skew crazy bid (1m 89.7%ile, 3m 93.2%ile, 6m 96.5%ile!), while upside Call Skew remains Charmin-soft (1m 24.1%ile, 3m 29.8%Ile, 6m 28.9%ile,” Nomura’s Charlie McElligott said Thursday. He noted a “similar dynamic in VIX, where medium-term, we see upside Call Skew staying ‘sticky higher’ as VIX downside out 3m is soft.”

Nomura

Apple “should” have surged considering the quarter the company put up Wednesday evening. Instead, it meandered. Facebook, on the other hand, was up sharply.

Q1 GDP came in robust, as expected. Output is on the brink of regaining pre-pandemic levels. Jobless claims pointed to more progress in the labor market. Good news, all. But on the heels of a historic tragedy.

Read more: Pyrrhic Victories

Thursday brought the usual hodgepodge of soundbites from Republicans and Democrats debating the merits of fiscal stimulus. Do we want safe bridges or don’t we? Is education important? What exactly is “infrastructure” anyway? Maybe there’s no such thing. Maybe Joe Biden’s plan is all a ruse. Maybe infrastructure doesn’t really exist. I’ve seen bridges, sure. And pipes, under my sink. But I’ve never seen “an infrastructure.” How do we know it’s not like a unicorn? Or a yeti?

I’m kidding, of course. But it’s hardly surprising that the GOP lacks creativity when it comes to conceptualizing of infrastructure. Malign Biden all you like (and I have a large GOP readership who were undoubtedly doing just that today), but there’s no denying his contention that Beijing is moving quickly to take advantage of what Xi knows is legislative paralysis in the US. The longer America waits to modernize, the quicker China will catch up and, ultimately, overtake America on any number of fronts. While America’s elected representatives sit around and argue over whether pipes count as infrastructure, Xi and the Party press ahead.

In any case, lawmakers will either figure it out or they won’t. If they don’t, “our grandchildren” (as deficit hawks are so quick to cite) will have a lot more to worry about than the national debt.

10-year yields briefly rose to a two-week high, but ultimately, Treasurys trimmed losses. Yields were cheaper out the curve, but only marginally. Jerome Powell’s dovish messaging from Wednesday likely took the edge off, although one might have assumed the solid data stateside would have helped keep bonds heavy.

“Thursday proved to be a more bond-bullish session than the economic headlines might have otherwise implied,” BMO’s Ian Lyngen and Ben Jeffery said. “As we ponder the final day of April, the return of Tokyo [from holiday] will provide a meaningful litmus test for dip-buying interest, (although next week begins with three Japanese holidays, so it’s not unreasonable to assume continued low conviction), as will any month-end rebalancing needs,” they added.

It’s still bad in India, in case you were wondering. If you’re a US citizen and you’re there, you should leave. That’s according to the government. America’s government, I mean.

“Access to all types of medical care is becoming severely limited in India due to the surge in COVID-19 cases,” the US Embassy said. “US citizens who wish to depart India should take advantage of available commercial transportation options now.” The State Department issued a Level 4 travel advisory.

The latest data from WHO showed the country is now averaging some 340,000 new cases per day (figure below).

Daily deaths are near 2,300, although it’s generally accepted that the official count is woefully understated.

The US is set to send $100 million in aid to the country in a bid to help stabilize the situation.

Apparently, the oxygen shortage should abate within a few weeks. “India’s severe medical oxygen supply crisis is expected to ease by mid-May,” Reuters said Thursday, citing an industry official. Output is set to rise by 25%, while “transport infrastructure will be ready to cope” with the surge in demand.

There’s that word again: Infrastructure.


6 thoughts on “Exciting, Dynamic, Price-Setting Mechanisms

  1. Markets don’t allocate capital efficiently. CAPM has been thoroughly debunked (see high/low beta anomaly), and capital allocation has been deteriorating at an accelerating rate since the early 1980s, likely due to ever lower interest rates that reward all speculation and keep zombie companies alive https://www.bis.org/publ/qtrpdf/r_qt1809g.htm.

    1. The low vol stuff, I find fascinating but I was wondering if it is still applicable to recent years where tech stocks have dominated performance… they do seem more volatile than the average, in general…

  2. When is national debt the worse thing that can happen to a country? There are some who think crumbling bridges, starving children, no internet and 40% of the population with less than $400 in savings is a fair tradeoff. Maybe they are hoping an undereducated citizenry won’t be able to figure out the con that’s being played.

  3. Yes, now we know better how one country sneezes and another catches a cold. Yet the Sensex (India’s Dow) is fully vaccinated from the malady and is about 1.5% from its record. We will see how this disconnect between risk assets and actual Risk plays out. The graveyard is there whether you whistle past it or not.

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