Some thoughts from Bloomberg’s Richard Breslow, author of “trader’s notes” on what is going through panicked traders’ heads, who writes that “well before any markets open, the minds of traders are racing furiously. What do I do with my positions? Arguments can be made for most outcomes, and commentary will follow price action, not the other way around.” Yes, because chasing momentum up for 7 years obivious of reality and ignorant of a $22 trillion central bank balance sheet led the “deer in headlights” to profitable utopiua.
Bashing of idiot momos aside, those who have had the “commentary” right every day since 2009 only to get steamrolled by central banks who have injected countless funny money into so-called “markets” to preserve the illusion of the status quo may be about to get their day in the sun… unless the central banks lob every last bazooka they have to prevent what could well be an epic carry-unwind bloodbath, and the beginning of the end of “faith-based” “markets.”
Here are some more thoughts from Breslow:
Reasoned market analysis will have to allow for stop losses getting off-side — or panic-struck or trying to be prudent — traders back to neutral, the potential consequences of the markets desks of every major central bank being on high alert and prepared to act (“plunge protection teams,” to use the vernacular of the financial crisis), as well as the frustrating reality of it being Sunday evening, which means markets will open ad seriatim and only slowly.
Those that are open will have to bear the brunt of whatever imperfect hedging can be done, while opportunity-seeking will only come as the day progresses. For now, all one can look to is the tiny Auckland FX market. Any headlines from there will signify nothing as Monday unfolds.
The reality is that the price of playing poker has just gone up considerably. Greece is counting on the referendum ploy to both win a little time and shock the negotiators into compromise. Their banks can’t open tomorrow. They have added their banking sector to the pot. The ECB has frozen ELA financing. Merkel, Hollande, and presumably most others will hold emergency cabinet meetings Monday.
The IMF has perhaps provided the most interesting tell when Managing Director Lagarde said that negotiations could be revived if Greek voters show they want to stay in the euro area
“If there was a resounding ‘yes, we want to stay in the euro for good, we want to be part of that, we want to restore the status of the economy, we want to be sustainable in the long run,’’ there would be a resounding ’let us try’”
That is why some resolution still remains the base case; but that will provide little solace to those who have to trade in a few hours.
So where does that leave us? CFTC data, a very imperfect gauge, tells us that if anything, speculative positions (long USD, short bonds) have been pared back. My working assumption, based on market movement, is that this crept back up over the course of last week, and those new positions, at the worst prices, will be most vulnerable.
Bund and UST futures closed Friday on the week’s low. Will people feel good about being short bunds that dropped almost 2 points from last Monday’s high? Unlikely. But bund futures open 8 hours after electronic trading in the U.S. 10Y future. My guess is the 10Y can get to last Monday’s high (1 1/2 big figures from here) before you take a stab at fading. I’d rather sell a new low. But I still don’t like bonds, and if they get silly toward the June 19 high, the charts say, yoo-hoo Fed watchers.
When FX markets open in Auckland, for all practical purposes only EUR, JPY, AUD and NZD will trade against the USD. Again positions will trump logic. That means JPY should do well; watch multiple June post-Kuroda USD/JPY lows circa 122.50
Carry trades being covered aside, the argument for a sustained higher EUR/USD is tenuous at best. “Whatever it takes” does not include tightening and the interest differential between bunds and USTs is not going to narrow
The top side has loads of resistance, 1.1250 to start; through 1.1050 and the technicians will be crying out for a retest of the May 27, 1.0850 low
E-Minis will also need to bear the brunt of any hedging needs from a European equity market that saw Euro Stoxx 50 futures rise over 100 points last week. It may well require seeing how Chinese stocks open, oh so many hours from now, to judge where this asset class is going. But I assume we are in for a period of relative underperformance of European stocks so I wouldn’t get too carried away selling U.S. equities. On the wide, technically, E-Minis look well supported just above 2070. The Hang Seng CEI opens at 9:15pm ET. After this weekend’s PBOC rate move, the gap from April 2 should hold as a good indicator of the next period in Chinese equities.
Markets haven’t opened yet. Just some thoughts before they do. This is why traders get paid the big bucks.
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Yes, “big bucks”, no pun intended, until the light shines on them and there is no plunge protection team to bail them out.