Trader Sees “Sense Of Confusion”, Not “Battle Of Wills” In Markets

Authored by Richard Breslow via Bloomberg,

Plenty of Price Action Signifying Not So Much

You certainly wouldn’t know it by looking at your screens, but it has been a wacky day. Equity markets around the world have switched serially from risk-on to risk-off and back again. But volumes have been unimpressive.

Depending on when you took a look, the world seemed very different. All adding up to a sense of confusion, rather than a battle of wills. Investors are meant to buy, yet don’t really feel like it. That failure once it got back to flat on the year has really thrown a spanner into the works. A reality check if ever there was one. But, it will probably need to be retested. If it doesn’t happen soon, the significance of the level will be very high.

Bonds aren’t moving all that much, but trading volumes, especially in longer-duration maturities, have been quite high. Go figure. Sell on infrastructure spending. Buy on central banks.

The narrative changes faster than you can say “mine… no, yours.” Strong bond sales. Sloppy auctions. Something for everyone. Poor foreign exchange is left thinking these other markets are just crazy. And trading with no clear theme. With a lot of crosses in no man’s land. You can have your choice of picking a currency pair that expresses your mood. Is it any wonder that the August gold future just sits on top of its 21-day moving average.

Inflation was reported in the U.K. this morning. Well below target. Higher than recent staff forecasts. Bang on consensus. Score one for the economists out there. They were due a winner. The BOE meets tomorrow. Will they, won’t they, with added stimulus. Personally, I hope they do nothing and see how the reopening of High Street goes. And people need to stop speculating about negative rates. At some point, enough is enough without further proof. Nevertheless, Sterling gyrated as if it was suddenly in play because of this number. Up, down and back again. How appropriate that when it was all said and done it went back to unchanged on the day before starting to leak a bit. That seems right. The MPC is Thursday. Man City versus Arsenal is tonight. And cable will just have to wait.

The urge by central banks to become increasingly involved in the markets is overwhelming. The global economy is reeling and they are fully committed to helping out. They should be applauded for the efforts. But they also need to be careful that they don’t impair market liquidity to the extent that the normal flow of trading is dangerously impaired. And price discovery distorted. There are any number of fixed income markets around the world warning that liquidity is becoming a real problem. And the law of unintended consequences is an issue that can’t be ignored. This hasn’t become a big issue in the U.S., but elsewhere, fixed income funds are showing signs of having trouble meeting redemptions. In some cases having to set up gates. And when credit investors get uneasy, they tend to do so in groups. They often don’t have a choice. Central banks need to take into consideration the realities of how long-term investors need to continue to function in the markets and fulfill their own mandates. And what things might look like when this is finally over