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So far, we can’t call the current market anything but a classic bear market squeeze – and we’ve got a ways to go before we can call it anything else. But the spectacular action today is of a statistically rare degree – what does it mean?
Earlier today (in our week ahead outlook), we took a look at a few potential drivers for the “ebullient” open to the trading action this week – and really, any number of drivers has a degree of credibility, but the most credible is simply the classic ebb and flow of a classic bear market – when long and steep declines are countered with consolidations of equally sharp rallies. It’s worth noting that most of the sharpest rallies in market history (here we are speaking of “risk markets”) are to be found in the midst of bear markets, so we’ll need to see a significant and persistent extension of the action from here to shift our view from “range bound consolidation” to anything resembling a full-on reversal.
Looking across the universe of risk indicators, we see mostly confirming action in the likes of EM risk indicators and EU bank stocks, etc. EU sovereign debt spreads have also come in sharply (Belgian 10-year yield falling 28 bps in the wake of the Belgian bond auction today, for example, while the German 10-year yield rose 6-7 bps.), though the basis swaps seem sticky at very low levels and remain a significant concern.
Just how unusual is today’s action?
Looking at the remarkable action in the markets today, with the S&P500 up some 3 percent in the futures from Friday’s close ahead of the actual open for trading today and with AUDUSUD up over 250 pips from Friday’s close at the same point in time, made me want to quantify just how unusual today’s action might be from a statistical standpoint. I was more than a bit surprised that since January 1, 2008, there have only been 6 other occasions when the US equity market has opened more than 3 per cent above the previous trading day’s close. The most recent previous occasion came two days after the May 2010 “flash crash”. On that day, the market opened up just over 4% and closed marginally higher from there, only to tank in the weeks that followed. All previous instances of extreme positive gap openings took place during the crazy days of September-November of 2008. As one might expect, AUDUSD reliably moved in synch with global equity market action on these gap openings – though its beta to equities varied somewhat on those occasions.
Chart: AUD/JPY:
AUD/JPY perhaps the highest beta pair in G10 currency land as higher interest rates, commodities and risk-on in general slam the yen and light a fire under the formerly very weak Aussie. Note that the pair has blasted all the way back to the 55-day moving average in today’s trade.
Odds and ends
The action in USD/JPY underlines the sensitivity of JPY to interest rates. It was very interesting to note the action in JGB’s last week, where yields jumped in response to the poor German auction and jump in bund yields. While it makes sense for global bond yields to move in synch, the most interesting aspect of the development was that it came on a day of risk off action (Wed-Thu in Asia). As we said at the time, the most interesting possible regime change in markets would be one in which risk off unfolded as bond yields rise. Today is not seeing this regime change, as bond yields are moving higher in a risk-on environment, the normal state of affairs.
While the headlines trumpet the strength of the US “Black Friday” retail sales activity, endless dissecting of the details out there shows that these strong results do not necessarily indicate a robust US consumer, but rather changing behaviour of shoppers and retailers around this event – particularly aggressive promotion and stores promoting deals as early as the stroke of midnight Thursday evening. (See ZeroHedge’s particularly acidic take on the US Black Friday story).
A Bloomberg survey of bond dealers shows that the consensus is for QE3 to focus on mortgage backed security buying by the Fed, to the tune of half a trillion dollars or more. This appears baked into the cake if/when US numbers begin to fade in the months ahead. After the October Fed Beige book was fairly downbeat, it will be interesting to see how the regional Feds feel their regions are faring as described in the November Beige Book set for release this Wednesday.
Looking ahead
We’ve got plenty on the agenda for this week, as we discussed in our Week Ahead piece earlier today. In the next 24 hours, we’ve got a bit of data out of Japan on tap for tonight and tomorrow we’ve got Swedish GDP, UK Mortgage data (and Chancellor Osborne out likely fleshing out his plan to sucker first time buyers into borrowing excessively so they can afford overpriced UK housing), Euro Zone confidence data, and US Consumer Confidence and US home price data. Let’s see where we are by the close on Wednesday to see if the move today has any legs in the immediate term. Beyond normal consolidation targets, we have our doubts, as nothing has really changed since last week save for the very fickle mood of the market.
Earlier today (in our week ahead outlook), we took a look at a few potential drivers for the “ebullient” open to the trading action this week – and really, any number of drivers has a degree of credibility, but the most credible is simply the classic ebb and flow of a classic bear market – when long and steep declines are countered with consolidations of equally sharp rallies. It’s worth noting that most of the sharpest rallies in market history (here we are speaking of “risk markets”) are to be found in the midst of bear markets, so we’ll need to see a significant and persistent extension of the action from here to shift our view from “range bound consolidation” to anything resembling a full-on reversal.
Looking across the universe of risk indicators, we see mostly confirming action in the likes of EM risk indicators and EU bank stocks, etc. EU sovereign debt spreads have also come in sharply (Belgian 10-year yield falling 28 bps in the wake of the Belgian bond auction today, for example, while the German 10-year yield rose 6-7 bps.), though the basis swaps seem sticky at very low levels and remain a significant concern.
Just how unusual is today’s action?
Looking at the remarkable action in the markets today, with the S&P500 up some 3 percent in the futures from Friday’s close ahead of the actual open for trading today and with AUDUSUD up over 250 pips from Friday’s close at the same point in time, made me want to quantify just how unusual today’s action might be from a statistical standpoint. I was more than a bit surprised that since January 1, 2008, there have only been 6 other occasions when the US equity market has opened more than 3 per cent above the previous trading day’s close. The most recent previous occasion came two days after the May 2010 “flash crash”. On that day, the market opened up just over 4% and closed marginally higher from there, only to tank in the weeks that followed. All previous instances of extreme positive gap openings took place during the crazy days of September-November of 2008. As one might expect, AUDUSD reliably moved in synch with global equity market action on these gap openings – though its beta to equities varied somewhat on those occasions.
Chart: AUD/JPY:
AUD/JPY perhaps the highest beta pair in G10 currency land as higher interest rates, commodities and risk-on in general slam the yen and light a fire under the formerly very weak Aussie. Note that the pair has blasted all the way back to the 55-day moving average in today’s trade.
Odds and ends
The action in USD/JPY underlines the sensitivity of JPY to interest rates. It was very interesting to note the action in JGB’s last week, where yields jumped in response to the poor German auction and jump in bund yields. While it makes sense for global bond yields to move in synch, the most interesting aspect of the development was that it came on a day of risk off action (Wed-Thu in Asia). As we said at the time, the most interesting possible regime change in markets would be one in which risk off unfolded as bond yields rise. Today is not seeing this regime change, as bond yields are moving higher in a risk-on environment, the normal state of affairs.
While the headlines trumpet the strength of the US “Black Friday” retail sales activity, endless dissecting of the details out there shows that these strong results do not necessarily indicate a robust US consumer, but rather changing behaviour of shoppers and retailers around this event – particularly aggressive promotion and stores promoting deals as early as the stroke of midnight Thursday evening. (See ZeroHedge’s particularly acidic take on the US Black Friday story).
A Bloomberg survey of bond dealers shows that the consensus is for QE3 to focus on mortgage backed security buying by the Fed, to the tune of half a trillion dollars or more. This appears baked into the cake if/when US numbers begin to fade in the months ahead. After the October Fed Beige book was fairly downbeat, it will be interesting to see how the regional Feds feel their regions are faring as described in the November Beige Book set for release this Wednesday.
Looking ahead
We’ve got plenty on the agenda for this week, as we discussed in our Week Ahead piece earlier today. In the next 24 hours, we’ve got a bit of data out of Japan on tap for tonight and tomorrow we’ve got Swedish GDP, UK Mortgage data (and Chancellor Osborne out likely fleshing out his plan to sucker first time buyers into borrowing excessively so they can afford overpriced UK housing), Euro Zone confidence data, and US Consumer Confidence and US home price data. Let’s see where we are by the close on Wednesday to see if the move today has any legs in the immediate term. Beyond normal consolidation targets, we have our doubts, as nothing has really changed since last week save for the very fickle mood of the market.