By Richard Breslow, Bloomberg macro commentator and author of “Trader’s Notes.”
Forgive me for being mystified, but I find the juxtaposition of headlines that list the number of pipe bombs sent to prominent citizens with claims that the equity market looks oversold and is due for a bounce unsettling and distasteful. The authorities warn that more such devices may be out there, yet global markets are beginning to bounce in Europe and the U.S. as risk sentiment improves.
And yet, traders remain confused as to why risk hedges haven’t been responding proportionately to a 9 percent sell-off in the S&P 500. If you ever needed more proof that financial markets have become disengaged from the real world, let alone the economy, here it is.
Equity markets may have to come to terms with no longer being the sacred asset class around which the entire monetary policy framework revolves. I just don’t see a single central bank changing their plans based on recent price action. Stock traders undoubtedly feel like the character Bart when facing a hostile crowd in Blazing Saddles and Reverend Johnson says, “Son, you’re on your own.” Of course, if the analogy is apt, shares will eventually see new highs. Famous last words, I realize.
Whether it was the Bank of Canada’s overtly hawkish comments when they raised rates yesterday or Norges Bank’s hawkish hold today, they are showing what they see as the way forward. The BOC was even so bold as to remove the word “gradual” from their statement. And ECB President Mario Draghi, while acknowledging the recent economic slowdown and the challenges raised by Italy, was not willing to concede any changes to well-telegraphed policies.
Investors are simply going to have to learn to live with a new reality. And we may finally get to see what they are made of. Proof positive, one way or another, whether this is all merely a financial bubble or not. The global economy may experience periodic ups and downs but what monetary policy makers are beginning to form a consensus around is things just aren’t as bad as official interest rates suggest.
The world may be having a growth spurt. Not the economic boom kind, but evolving to the point where it is normal to simultaneously have one country tightening and another adding liquidity.
All of which depends, of course, on the working assumption that those driving geopolitics don’t derail everything with their own policy mistakes and hubris. Which is a leap of faith they are forced to make, even as it gets harder all the time.
There are a few levels to watch today to see where immediate sentiment lies. Gold is the most obvious. It still doesn’t want to overcome even the lowest layer of resistance which runs from $1236 through $1250. Although, a trader told me yesterday that watching the equity meltdown, he was grateful to have bought the metal. Small consolation to the end of day P&L.
The fall in Treasury yields has felt almost grudging rather than a true change of heart. But if you see 10-year yields starting to leak through 3.08% take a very careful look at what is going on. And it didn’t take much for yields to scoot back above 3.12%. Like gold, the moves have so far stopped where they should to express concern but certainly no panic.
On another note, the dollar is making another attempt to break to the upside. It has failed here before. But don’t think it needs to wait to get past the midterms to do whatever it is going to do anyway.
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