- 01 декабря 2011, 17:59
- ZeroHedge. Alternative view on facts
First it was Goldman, now it is Barclays lamenting what is painfully obvious: what has gone up violently, will go down doubly so, once the market realizes that what the Fed and the global central banks have done is applying a band aid to a severed artery. Naturally, the disappointment will be substantial, and while Goldman is angry that its tentacles have to be retracted for a few more weeks before it can acquire the equity of some European competitors for a buck a share, Barclays is angry because it is very likely that it, together with fellow British bank RBS, will be on the receiving end of market fury. This explains the statement by Barclays' Paul Robinson who said that the "market updraft" was "exaggerated" and "it is not easy to make a case that the magnitude of the news quite justifies the magnitude of the global market reaction, in our view." That's ok - the short covering knows best... if only for a few days, because as Robinsons says, "Market participants seem as fearful of missing a market updraft as they are of getting caught in a downdraft" - in other words we are all momos now, chasing the leader and pushing the wild market swings into swings with ever greater amplitudes, until one day absolutely nobody will be able to trade the daily gyrations created by ever more frequent central bank intervention.
Wednesday marked the second "risk on" day of the past three, with the updraft as manic and (dare we say it?) exaggerated as last week's downdraft arguably was. For a change, Wednesday's market tone was not set by news from Europe, which ranged from the inconclusive (the meeting of the eurozone finance ministers) to the downbeat (October labor market conditions). Instead it was set by global central banks, and by upbeat economic data from the US.
In both cases, it is not easy to make a case that the magnitude of the news quite justifies the magnitude of the global market reaction, in our view. ADP is a fairly noisy predictor of employment growth, and one month of employment data should not be enough to alter significantly any careful thinker's view of the US economic outlook. A 10% increase in pending home sales looks impressive, until you have a look at the volatility of the series, and the base of comparison.
We can understand why investors may be heartened by the 50bp cut in the Chinese reserve requirement ratio; it signals a willingness to act pre-emptively rather than focus single-mindedly on an inflation problem that has quite probably peaked, but has not yet vanished. But given the weak linkages between Chinese monetary policy and global economic, monetary, and financial conditions, as well as the fact that Chinese authorities will have to continue balancing inflationary pressures against economic risks, neither the magnitude of the prospective policy shift nor the plausible effect on global economic and financial fundamentals seem proportionate with the exuberant market reaction.
Much the same can be said of the coordinated cut in the interest rate on dollar swaps. This addresses a real problem - the liquidity shortfall in important parts of the European banking system created by what we see as a slow-motion run on European banks by money-market investors. But it does not address the underlying causes of the withdrawal, just reduces by 50bp the cost of the officially provided substitute liquidity and (this is probably more important) extends the program into 2013.
We think Wednesday's market action highlights two relevant features of the existing market context. The first is the power of positioning, both financial and sentimental. If markets have been range-bound for the past couple of months, it is not because they have been subject to weak or static fundamental drivers. It is because they have been subject to very powerful but contradictory pressures, driven on the one hand by deep anxiety about weak fundamentals and substantial tail risks, but offset on the other hand by an equally powerful market context created by bearish sentiment and defensive positioning. Market participants seem as fearful of missing a market updraft as they are of getting caught in a downdraft. Nothing new here, but something to remember next time markets seem to be in a "meltdown" mode.
The second feature is the hunger for the kind of policy response that investors heard about on Wednesday. After a year during which policy in key advanced economies has been, on balance, not wholly convincing, even small steps forward are disproportionately welcome. It is in this context that we await the outcome of the December 9 EU summit, and announcements in the run-up thereto, including (for example) the anticipated announcement of the Monti government's economic and fiscal reform program. Some investors, at least, seem to have come around to the view that things have finally become scary enough to expect EU policymakers to address the underlying problems more definitively than they have been able to do so far. We think the stakes are high in the policy announcements that are made in the coming week.