Looking good on the outside, but markets are topsy turvy from the inside
Monday was a funny old day in the markets. After the rally which we have seen in risk assets in the aftermath of the ECB’s “line in the sand” announcement and the tabling of QE3, a little breather was called for and on paper the slight retracement which we saw could easily be explained away as no more than a bit of profit-taking after the strong performance and the markets catching their breath before the next leg higher.
However, sitting in middle of it, it didn’t feel that way at all. It all felt tired and directionally uncertain. Outside of the new issue business, bond flows were slow and uncommitted. The extraordinary price action in the oil markets caught everyone by surprise and even this morning I get the impression that traders can’t quite fathom what happened and how.
At around noon in New York, the West Texas Intermediate contract which trades on NYMEX as the benchmark light, sweet crude suddenly lost its footing and gapped around US$4 in as many minutes from US$98.70 to US$94.80, only to close at US$96.65.
Rumour has it that the US is going to release strategic reserves in the face of growing tension between China and Japan and there is of course the ongoing chatter about what Israel intends to do with Iran as it faces its fears of what Iran might be planning to do with it.
More likely, however, would be a negative reaction to the September Empire State Manufacturing Survey which reported in at a pretty disappointing –10.41 whereas the consensus forecast had been for a drop of a mere 2.00. The Empire State is a volatile index and is the closest we get in the US to the Bank of Japan’s quarterly Tankan survey in that it attempts to capture manufacturers’ current sentiment and their future expectations at the same time.
It is, alas, in comparison to the Tankan a fairly blunt instrument and hence not a tool for subtle interpretation. However, while risk asset markets have been in recovery since early June and the Dow and S&P are “en fuego”, the Empire State is trending lower. It peaked in March of this year at 20.21 and has bounced around since – I did say that it is quite volatile – but to find it at –10.41 was not in the script and is the lowest reading since April 2009.
Sustainable growth has not yet arrived
Customarily, markets have a habit of latching on to economic releases which justify the direction in which they are heading and dismiss the others as aberrations and outliers. Then, from time to time, one finds one particular release which cranks the turn-table and sends the train in the opposite direction. I don’t think that this Empire State is, per se, the turning point in the three-month risk asset rally, but it will have a few folks scratching their heads. Let’s face it, there is nothing in the key data which would confirm that sustainable growth is with us yet and, if it were, it would by far not be sufficient to meaningfully impact on the employment situation for the better.
John Kay on legislation changes
Meanwhile, a few days ago, I heard Professor John Kay being interviewed on the BBC. It is no secret that I myself worship at the altar of Professor Kay’s wonderfully clear and pragmatic opinions and I was delighted to hear his reply, when asked whether the changes in legislation would be sufficient to prevent another banking crisis like the one we are now finally emerging from?
He elegantly answered that we are now perfectly positioned to prevent the last banking crisis but that the authorities have done nothing to stop the next one. When questioned, he confirmed that many of us know, namely that the teddy bear in the wood-pile is sovereign debt and when asked further whether this had not just been dealt with, he suggested that might only just be in foot-hills of the head-lands.
There are, I believe, three basic phases in the resolution of every crisis. The first is to identify the problem. Check! The second is to develop the systems needed to combat the problem. Check – well, a little bit maybe. Finally, there is actually resolving the problem by implementing the systems with sufficient rigour in order to not only slow or even stop the faulty developments but to reverse previous results. Not at all check.
In the nicest possible way, Kay reminded the interviewer that, although the longest journey begins with a single step, taking that step does not necessarily guarantee that the walker either knows the itinerary or that he will have the staying power to complete the journey. I’m not sure whether the interviewer either heard what he was saying or, if he did, whether he was really listening.