Seeking Order in the Confusion


I have spent most of my life working in or analyzing financial markets. I honestly believe I can state that the current situation here in the US is one of the most confusing I have ever known. Not the most chaotic. That honor goes to a non-stop 36 hour session on a Sterling desk back in 1992.

The Bank of England had spent all day buying Pounds to keep the currency in the bands of the European Rate Mechanism (ERM), a forerunner to the Euro. At around 4 pm they told us, as their broker, that they were no longer on the bid. You can only imagine the chaos that ensued as it dawned on the market that, for the first time in living memory, traders had broken the will of a Central Bank. We worked all through that night and the next day, much of the time spent recalling and checking trades from the first three or four hours of mayhem. But I digress.

The major financial markets have an orderly, but confused, feel to them here in the US right now. There has been little movement over the last few days, which suggests that floor traders are feeling confused as well.

The problem is that any piece of news has two possible interpretations. If you follow the financial markets closely you will be aware of this already. If news comes out that is good for the economy, then it could hasten the tapering and even eventual ending of the latest batch of QE. The market has become so dependent on this cash injection that fear of losing it cancels out any benefit perceived from an improving economy.

It sometimes makes me wish the Fed would just call an immediate end to it so we could get back to normality, but then I consider the consequences of an abrupt end and realize we are way beyond the point where that can be done. So, it looks like we are stuck in a period when everything sends contradictory messages.

One of the problems this situation has produced for market watchers is that some of the old, reliable relationships have broken down with it. Conventional wisdom tells you that when stocks go up, bonds go down. Money is traditionally split between the two asset classes, moving to bonds in times of uncertainty or negative outlook, and to stocks when things appear a little more optimistic. Lower bond prices mean higher yields, so, conventional wisdom says, yields and stocks move in tandem. When there seemed to be no end to QE this relationship fell apart. The nature of the program, whereby the Central Bank bought bonds in the open market, naturally raised the price (and therefore lowered the yield) of bonds. At the same time, financial institutions were left holding a bunch of cash that needed a return. Stocks were the obvious place for that money and this drove the stock market higher. Yields and stocks moved in opposite directions.

This tendency just added to the confusing messages the market sent to old hands like me. Since the end of QE has been discussed, however, some degree of normalcy has returned in this relationship. Take yesterday for example.


The above is the 1 Day chart for the 10 year T Note yesterday, and below is the S&P 500.


Late in the day buyers of bonds emerged, pushing yields back toward the previous day’s close. The S&P 500 was, at that time, still trading significantly higher on the day. There was a time when this would be an automatic trade for floor traders. The bond market generally leads, so, after the drop in yields, one could expect a drop in stock prices. This came eventually, but the reaction was slow. The delay is not surprising given the unreliability of this correlation in the last couple of years, but at least it came.

I believe this relationship has re-established itself and the bond market can once again be used to predict possible moves in the stock market. I certainly hope so. Old people like me don’t handle change too well, and this world of doublespeak economic data is driving me nuts. Please let something make sense again!


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: News Headlines , US Markets , Bonds , Economy

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Martin Tillier

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