It’s not easy to summarise where the ugliness was at its worst and the news channels are full of how poorly equities did with not a word for bonds, other than maybe a fleeting glance at Greece.
Fact is, there is nothing we didn’t know which has suddenly sprung to the surface; it is simply that markets have finally done some joined-up thinking and have found that growth might in fact be just around the corner, but that nobody has binoculars strong enough to see far enough along the horizon to where that corner might be.
While European equities were crumbling and while US stocks were performing their double bungee jump, bonds were having their moment of near capitulation. When headlines flashed that the US 10-year was below 2% and Bunds were below 0.75% things looked grim. Investors who were long were laughing, but the Street was clearly not positioned that way and got carried out.
The headline which caught my eye was that the Goldman Sachs recommendation to be short 3-year notes had been stopped out. That, however, was just the tip of the iceberg as dealers scrambled to cover shorts. The speed of the movement, initially following an October Empire State Manufacturing Survey that missed forecast by a county mile – 6.17 versus consensus of 20.25 – caught all and sundry off-side and the Dow plunged 350 points on the open. The VIX index went entirely bananas, spiking up to just over 31 points but then rallied back and closed at 26.25 points, the highest since June 2012.
Clearly the market took fright at its own courage, or lack thereof, and it spent the rest of the session trying to work out which side was up. They wanted volatility, they got it. I’d love to sit in and listen to some of the traders who have been moaning that without volatility money cannot be made while getting a sneak view of their respective P&Ls.
Positioning risk
That aside, we saw what happens in a market place where positioning risk has all but been outlawed. The capital pool which is required by the street to absorb the pressures of a business which is either all-bid or all-offered had been withdrawn. It’s been replaced with a little neon sign attached by a button on the trader’s desk which he can press when he gets a call. It lights up reading: “Sorry, we’re not axed to bid”.
The bond market has developed over generations and for years and years it worked extremely well. After a once in a century failure of the market mechanism, politicians and civil servants with copper-bottomed pensions funded by us decided that they knew a better way to run the business. To describe what we saw yesterday as a mess would be polite.
Most probably the most asinine comment I picked up this morning was one which declared current levels to be a screaming buy because we are just ahead of the US reporting season. With reporting corporations in black-out, they have to suspend the share buy-back programmes… so the market is undervalued due to the absence of that strong technical bid which will be back with us in three weeks or so when reporting is done. Sorry, but if a corporation is sitting on a strong, cash-rich balance sheet when there is the risk of a global economic slowdown and the board decides to fritter that cash away on totally unproductive share buy-backs, I’d have the blighters lined up and shot!
Much of the immediate disaster was, to repeat, not the fault of the economy or the risks therein but of the Street’s inability to equalize the pressure created by sellers. Once certain levels are passed and stops are triggered, there is nobody there to face them – “Sorry, I’m not axed to bid” – and one ends up with an involuntary free-fall. I guess the only things which would have been bid yesterday would have been donuts which are to be placed in January’s bonus envelopes. Yes, the Street got filleted.
Buying Bank of China
All the while, the Bank of China was busily gathering orders for its AT1 issue which was eventually garnered an order book of US$28.1 billion for an issue of US$ 6,499,803.648.00. Don’t ask me where that number came from, but that is how the deal was structured and priced. It was a gutsy move by both the borrower and the syndicate to press ahead with the transaction, given the environment and no less courageous of the investors to stick with the deal. It traded around the issue price overnight and opens in Europe this morning at a small premium which is not a bad result, given the retracement of the US Treasury market. I’m not a huge fan of CoCos but I take my hat off to all parties involved.
Today will surely see some easing in the tensions but I would not be looking for anything other than a small technical rebound on a spot of short covering. This is not a time for heroics.
