On Friday – when the Fed’s Industrial Production index for April booked its fifth monthly drop in a row and when the Michigan Consumer Sentiment took its worst dive since December 2012 – the S&P 500 vacillated languidly in a very narrow price range, and some last minute buying brought it into the green, up 1.6 points, to a fractional new all-time high, after having set a new high in a similar manner on Thursday.
Since February, it has bumped about a dozen times into the upper region of its narrow trading range, poking through it a tiny bit occasionally without being able to break out convincingly. But it hasn’t moved down either, dipping fractionally before ticking back up. All on very low volume. It’s as if normal volatility has been completely banished from stock indices.
While this sort of mild vacillation has been going on for months and has lulled investors into self-satisfied sleep, thinking that the Fed would step in at the slightest drop to save the day, all kinds of mayhem has broken out in bonds with long maturities, in the currency markets, and in commodities.
Oil plunged to multiyear lows then bounced off and was at one point up by 40% from that low, before succumbing once again to the notion that the global oil glut has not somehow magically dissolved after all. Iron ore and other commodities in over-supplied markets went through similar multi-year lows and majestic, if short-lived surges.
Currencies, oh my. The euro plunged against the dollar then rose sharply again. Earlier this year, the Swiss franc soared by nearly 30% in minutes when the euro peg was abolished , then eventually fell back and then re-climbed. Other currencies crashed and then re-soared, including the Russian ruble.
And then there are sovereign bonds with long maturities, particularly those of the Eurozone, and most particularly German Bunds. Two months ago, their 10-yield was on its way to negative, in a market that, after years of central bank interest rate repression, powerful jawboning, and finally actual QE, had become infested with risk but offered no income in return.
When the German 10-year yield hit 0.05%, seemingly destined to become part of the “negative yield” absurdity that has been playing out in Europe, it suddenly turned around. Prices plunged and yields soared. Traders who’d been front-running the ECB’s QE gravy train, suddenly jumped off and turned it vociferously into the “short of a lifetime.” Those on the wrong side, lost a lot of money in a hurry.
This is playing out when everyone, from central banks on down, has been fretting about liquidity in the bond markets, knowing that buyers will simply evaporate at current prices when the selling starts in earnest, and will have to be lured back in with much lower prices. A disturbing scenario for folks worried about “financial instability,” as it’s called in central bank jargon.
And so, Christine Hughes, President and Chief Investment Strategist at OtterWood Capital Management, wrote how how big moves up or down have impacted four different asset classes – sovereign bonds, currencies, equity indices, and commodities:
I’ve spoken at length about vanishing liquidity in the markets, particularly bond markets.
The important thing to take from this chart is that bonds and currencies (blue and red lines) are becoming more volatile than equities (black line).
This is completely backwards to how capital markets typically behave. It is stock market volatility that is well known and feared, but we are seeing the reverse unfold….
This is one more aspect of how central banks around the world are distorting the markets by gobbling up bonds and repressing interest rates. Their actions inflated asset prices and made the normally very volatile asset class of equities the most sanguine asset class, with investors floating complacently on cloud nine. And it introduced breath-taking volatility into currencies and into sovereign bonds that should be an island of stability.
And Hughes warns, “The exit doors in the bond markets are getting very small. Buyers beware.”
But not just bonds. Stocks, art, housing, VC portfolios of billion-dollar startups… everything is on the line. Read… Afraid of Losing Trillions, Wall Street Fights Fed Rate Hikes
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Very helpful post. THANKS !
Can’t figure out heads or tails of this market drunk in CB induced liquidity molasses and manipulated to the hilt in unchartered Keynesian wet dream territory…
You are absolutely right. Isn’t it interesting how everything done by government is always untested, Keynesian academic theory, which is always guaranteed to fail.
There was that famous saying from Churchill who said,
““You can depend upon the Americans to do the right thing. But only after they have exhausted every other possibility.”
Isn’t this true of government and central banks in general?
A lot of twitchy trigger fingers. You can get slaughtered in a heartbeat. Tom Lee was on Bloomberg this morning saying that 2015 will see double-digit returns as companies reap the benefits of low fuel prices. The companies themselves disagree, projecting weak earnings, but so what.
Everyone is elated because Q1 EPS wasn’t as bad as expected (as opposed to “good”) but that’s a 2% growth YOY using financial engineering. Actual sales have sucked. Yet another round of flat revenues and increasing earnings (instead of EPS they should call it EBS – “ex bad stuff”).
Tom Lee – what a schmuck and certainly market “paid” poster boy tout.
The pros are calling in the retail investor suckers with the pimp media exhorting the indices hitting all time highs. Market is drunk in crooked accounting financial engineering AKA non-GAAP pro forma, mark to market accounting shenanigans , etc. That said indeed twitchy fingers abound ready to run for the hills via what may be crowded exit door with increasing volatility.
Understand this; CB’s are not desperately trying to hold the economy up.
This is by design, as was 2008. Bernanke could’ve simply bailed out Lehman to stop it, but he didn’t. He then went on to print many, many times what it would’ve cost to bail out Lehman.
Higher interest rates will crash the markets and economy, so most assume the FED won’t do that. They should consider 2008, and ask themselves why the FED let Lehman fall, causing the financial crisis.
“Oops! We accidentally caused another crash! Silly FED…”
I would politely disagree with you on what you just said concerning central banks not being desperate to uphold the economy: Otherwise one would have to ignore all the schemes which central banks have been doing since 2008. Lehman was allowed to fall because it was a direct competitor to JP Morgan and not a shareholder of the Federal Reserve!
The illusion of central bank omnipotence is disintegrating right in front of everyone’s eyes.
What happens when the next crisis arrives? What will the central bankers do? (A: wring their hands and weep … )
Nope. Why would they? I am willing to bet that there’s a group of people in the United States that’s preparing to unleash the trade of the millenium i.e. the “bankruptcy” of the US. Once that happens they’ll just fly over to New Zealand and live like emperors. The central bankers will just turn the crank when the moment arrives.
The CB is anything but omnipotent, but that does not make them blameless. What will they do when the next crisis hit? What they do best: place the blame on others and bail out their friends in the financial community.