From Sizzle to Simmer, Overnight

By: Michael Ashton | Mon, Mar 12, 2012
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Have we forgotten how to trade anything except Europe?

Bonds today were unchanged. The S&P ended with a gain of 0.02% after trading in a 6-point range all session. Volume barely cracked 600mm shares, easily the quietest Monday of the year and barely exceeding the 599mm shares printed on the slowest day of the year so far, February 24th. It bears reminding that, with the exception of the day after Thanksgiving and the week between Christmas and New Year's Day, the equity market hadn't seen a day with only 600mm shares traded since at least 2004 (the data provided by Bloomberg only go back to 2005). And now we have two of them in the span of slightly more than two weeks.

We are only days removed from the most-threatening period of financial disruption since at least 2008, and that assumes that we are removed from that period. It is not clear yet when the next shoe will drop, but one seems likely. Will it be Portugal, with 13.3% ten-year-notes? Spain, which just unilaterally announced that it will not deliver a deficit/GDP ratio this year that it had previously agreed to? (They said they preferred 5.8% to the 4.4% they'd told the EU). Or Greece again, for any of ten different reasons?

Let's revel in the calm, I suppose. If Europe can go from sizzle to simmer for a few weeks, attention will turn soon enough to the Middle East where Syria, Iran, and Israel/Gaza all offer compelling story lines. Any one of these stories is probably not enough to move markets, but any overlap in the stories (Iran expresses overt support for Hamas in Gaza, for example) could have non-linear effects in the market - that is, energy markets may suddenly care.

On Tuesday, the FOMC is meeting, but there are no expectations for anything more than token tweaks to the official statement and certainly no hint of any change in policy on the horizon. The market will be quiet and thin, less because the FOMC is meeting than because hey, the NCAA bracket won't fill itself out! (Plus, the NFL free agency period begins...with the NFL today taking a page from the Troika and instituting an NFCAC, changing rules retroactively to seize $46mm in salary cap space from Washington and Dallas and distributing it to other teams. But I'm not bitter.)

In principle, the 8:30ET release of Retail Sales (Consensus: +1.1%/+0.7% ex-autos) could trigger some volatility, but I honestly don't expect it.

It isn't just that the market is thin. Thin markets can be volatile and whippy as moderate-sized flows push prices around. It's that the market is thin and investors and traders are remarkably noncommittal, so it is thin and lethargic. I don't know what that indicates, exactly. It could indicate that investors are very conservatively positioned, so that there is a lot of "potential energy" when they come off the sidelines. But it could just as easily mean that investors are fully committed to their favorite strategy, and will run for the hills if it stops working. I've seen both kinds of markets, and they are not easy to distinguish a priori.

I am not one who changes positions just because nothing is happening, however. I remain bearish on fixed-income, bearish on equities (although with the success of the Greek tender I am not adding any more to put positions), and bullish on commodities. I don't expect to win all three of those bets.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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