Authored by Richard Breslow via Bloomberg,
Equities are having quite a nice rally today. And it’s a global phenomenon. My guess is the majority of traders took one look at their screens this morning and did a double take. And then began scouring the news to learn the reason.
Some of the explanations are quite plausible. Some a bit of a stretch. But buying the dip has, for the moment, paid off once again. Now it will be all about the follow-through. And the air is a lot thinner at this altitude.
I get the sense, however, that there will be a lot more equity bulls up here than were loving the market down there. And just as many fixed income players mystified by this modest back-up in yields. Do huge size and it doesn’t take a gigantic move to be felt.
Traders still insist on sacrificing location on the altar of a good story. There have been a lot of block trades going through looking for a further fall in yields. And the five-year Treasury looks very different back at 1.40% than it did retesting 1.30%. Especially with the reality check of taking into account what happened to the yield last September and October when it also got down there and failed miserably. So much for “third time’s a charm” for the bulls.
I was listening to one analyst this morning try to explain the moves as occurring in expectation of a “V-shaped” recovery for the Chinese economy once this “incident” is behind them.
Now that is an explanation that’s hard to swallow.
But if you want to put it down to central bank and regulator reaction functions, who can argue? Not to mention local reports of insurance companies prepared to make sizable purchases, if necessary. We have City Hall. They have the China Securities Regulatory Commission.
Separately, it didn’t seem insignificant that the RBA, after keeping rates on hold at today’s meeting, and keeping their previous GDP forecasts unchanged, presented a refreshing, if still modest, upbeat assessment of the external environment. The statement included the line “There have been signs that the slowdown in global growth that started in 2018 is coming to an end.” But for those looking for the “V” around the corner, they also, correctly, pointed out that there is no way to know how long the hit to the Chinese economy will last.
Still, coming on the heels of other optimistic comments by Fed and ECB officials, maybe things are indeed looking up. Or at least the official narrative might be slowly changing. But there remain a lot of “ifs” out there, which we would be well-advised not to assume away. Yet, if central banks are trying to stay on hold, with a tacit willingness to still do whatever it takes should the need arise, on top of a global economy that may be showing life, ex-this catastrophe, it’s possible good news can be good news. Or, I’m being hopelessly optimistic. But you have to try it out every once in a while.
The Shanghai Composite Index remains in a large, long-term ugly range. There is very little technically that’s giving helpful direction in the big picture. And, as we’ve witnessed, it can make sizable moves, ultimately signifying little. It also likes to have periodic booms and busts. In the shorter-term it doesn’t look like it is out of the woods yet. It’s a tough trade. And you had better know all of the actors involved if you want to play.
Aside from all of the reasons which may or may not have been the cause of the global equity move, it’s tempting to give some credence to the theory that the mess in Iowa last night was a contributing factor. Traders have their own unique priorities and worldview.
Tue, 02/04/2020 – 09:45
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Author: Tyler Durden