Graeme Jarvis is Westpac’s Director of GCM Strategy, and a trader. He is also the best trader/strategist in Australia whose view I listen to most when it comes to macro market moves.
In his note this morning Jarvis highlights that the many ex-poste rationalisations for what caused last nights huge sell off in European and US stocks and which is weighing on the ASX this morning are really just “excuses that help explain last night’s price action. They are not the reason for last night’s price action”.
Rather Jarvis points to something bigger happening in markets at the moment.
There are two massive points that are pointable which is why I can say that with confidence. This is despite the fact that everything else you read this morning will feature those ideas as the cause of last night. The points that are pointable are the US treasury market and the USD. They are kind of a big deal. Yet, in the face of everything that went on in equity and credit markets last night yields are basically flat and the USD has not budged from where we left it. That is an impossible reaction if Russia, BESPL or Argentina were the cause.
An additional kicker is if you are truly were worried about Russia why did the market (for credit default swaps) initially open tighter last night? Sure it then moved lower and wider but that is because everything else in credit and equity land was moving lower and wider. An addition to the addition is that if you were truly worried about Russian sanctions/reactions why take XO +20bp wider while only taking Russian sovereign CDS +5bp wider. So if it was not any of the excuses above what was it about last night?
Here is where I recycle back to the very tired avalanche analogy. I don’t know exactly which snowflake caused the move lower but there were signs of stress within the system. There was divergence between European national equity indices and the broader Eurostoxx, divergence between the Russell 2000 and the S&P, divergence between junk bond ETF and HY credit indices, divergence between Eurostoxx Financial Services sub index and FINS, recent (all July) divergence between equity markets and credit indices and the biggest kicker of all the approaching end of QE3.
None of those reasons/observations are enough to independently cause the massive de-risking seen last night, but they are a completely different beast when they accumulate. Things within overnight moves have been causing me bug-ation of late. The simple was not making a whole lot of sense. I mean just helicopter the last two days price action. Yesterday rates markets were absolutely hosed and the USD bingo bid on better than expected economic data. Those trades make sense. What made no sense was the fact that equity and credit markets did nothing.
Last night equity and credit markets were punched in the throat and yet rates markets and the USD are taking their turn at trading flat. The two days make no sense in totality or in isolation. Gut wrenching two-way price action occurs at market tops and bottoms as it is a means for positions to get distributed. Distribution is never a clean procedure. That is what I thought was occurring and if you accept that then last night is a direct result of the end of that process. Things really can run a lot further….
Can anyone recall a time, in a non-GFC environ, that markets have reacted to violently the day before payrolls? That right there is a thinker and has gotta raise the stakes as we head into the 10:30pm release tonight.
The ASX is down 1.4% as I write. The US non-farm payrolls are released at 10.30 pm AEST tonight – traders all over the world will be watching.
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