“What we’ve got here is a failure to communicate,” appears to be the message from the markets as they trade sideways, with wide-ranges rapidly reverting day after day, unable to decide whether trade-wars will happen, if dips are to be bought, if vol is to be sold, if Trump will be impeached, or if the globally synchronized recovery is gaining strength or flailing.
Former fund manager Richard Breslow asks “does familiarity breed contempt?”
It certainly doesn’t have to. But if it does, there would be a lot of justifiable reasons to glower at the screens. Markets are in fact waffling back and forth and merely pretending to be making progress.
We keep asking for things to break out but seem to be rewarded only with pimples. Now, that really is a communications failure.
I’ve been trying to figure out why markets are behaving in such a hinky fashion. And, if you will forgive me, I have a theory..
Sadly, it’s a familiar one. If old habits are hard to break, new ones can be even worse. And while the global economy, the most recent economic releases not withstanding, is making a concerted effort to normalize, we categorically refuse to let markets find their equilibrium values. Doesn’t matter what asset being discussed.
This morning we had another data miss. This time from France. Does that matter? It should. But not in the face of a slew of comments from ECB’s Ewald Nowotny that sound hawkish and say nothing. Trying to trade these events is virtually impossible. Stage managing events leads to gap, stop, gap, stop, not smooth results.
We keep moving between reality and reaction functions. What’s described as risk on or off isn’t helpful when it changes hour by hour. It often doesn’t even last days, let alone the traditional longer periods that actually allow anyone to trade. Waiting for the next shoe to drop is a tough way to make a living. Especially when algorithms respond to every input based on the shallowest interpretation.
At least during the financial crisis we all understood what the game was. Keep stocks moving higher, bond yields going lower, and make sure everyone’s currency is kept under reasonable control. Knowing it was an explicit part of the forward guidance. Nothing has changed. It’s just that it’s no longer fashionable to officially admit it.
As a result, every setback is still met with the buy the dip debate. No matter the cause. Every rally is met with declarations that all is good. Even as no one believes that to be the case. If we admitted that most of the time all news is marginal in describing a very complex world we’d have much more measured responses to it that would allow the natural clearing of supply and demand, in some sort of orderly fashion.
Huge and disruptive moves like we have seen in aluminum prices the last few days, which by the way have completely changed the technical outlook for the commodity complex in general, are a normal part of trading. Having this happen intraday, randomly for often insignificant reasons and on a constant basis will ultimately kill these markets all together.
Traders can’t decide one moment to the next whether it’s student body left or right. They can perhaps be forgiven for this even if the risks of being serially caught wrong-footed increase.
Central bankers need to decide if the global economy stands on bedrock or egg shells. If they can’t, policy risk is multiplied. And it won’t be helpful if the conclusion is that all errors can be fixed by playing with the market.