Trader Mocks Markets “Behaving As If Middle East Tensions Are Yesterday’s News”

Authored by Richard Breslow via Bloomberg,

This is crazy stuff. The market wants to conclude that honor has been served in the Middle East and we can all stand down and move along. The central bank can keep its powder dry for the next upset. Fed funds futures are back to flat, so there must not be anything to concern ourselves with. Such is the enduring influence of a world that turns on low rates forever. And lower pro re nata.

Extraordinary.

Now we are being told, traders were “prepared” for the latest episode so they were able to take it in stride. I assure you, when the events of last night were taking place, no one in the market knew where all this was headed. And it seems doubtful that the matter is now closed. But for the moment, it is what it is, and traders will have to deal with it.

Once again it has been demonstrated that prudence doesn’t pay in an environment where all of the incentives are geared toward encouraging taking on more risk.

The talk about asset bubbles and over-leverage is cheap. Investors know what they are supposed to do. And if they think the message needs to be reinforced, the six Fed speakers still to come this week will no doubt be prepared to soothe our nerves.

Ten-year Treasury yields certainly bent but did not break. They ran down to 1.70% which is a picture perfect technical place for them to have stopped. Remember that level going forward. North America looks to be starting the day with yields back above trend line support and caught between close Fibonacci support and resistance levels. How that plays out, the market seems unprepared to decide. One of the more interesting trades overnight was through options targeting a move higher to 1.90%. A modest move, but perhaps directionally informative.

S&P 500 futures have behaved more than impressively. They had every reason to crack when they briefly broke near-term support but have held up like champions. They trade like people need them. Now we’ll have to see if the index can reward the bulls by building up some upside momentum. In any case, it’s obvious that it is the strong hands that are long. Now we’ll see if they have infinite patience.

The dollar, perhaps second only to the yuan, makes currencies a very important asset to keep a close eye on today. It’s demise has been predicted by many, but it certainly doesn’t look like it’s ready to oblige. The Dollar Index is pushing up against meaningful resistance that will either be a multiple top or signs of a potential next leg higher. It’s definitely in play. Given how the euro and yen are trading, it seems hard to fade the move just yet, if so inclined. So far, so much, for this being the year Europe was going to be the star of the show. The entire spectrum of currencies trade like the market has just been the wrong way around and their positions are being sorted out for them. They are fortunate that the overall moves have been somewhat modest.

Emerging market currencies as a broad asset class have been a very tough trade so far this year. Investors want to be long. December certainly put that notion in their heads. The thing to watch is if the lack of momentum causes a rotation into the high yielders and they become overly subscribed and riskier than they look.

The market is behaving as if events in the Middle East are yesterday’s news. We’ll see if that continues to be the case.