'Normal isn't normal anymore' - a Morgan Stanley equity MD explains what's troubling investors

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Last week was a great week for stocks around the globe.

But it was also a bad week for commodities with crude oil under renewed pressure and copper making a fresh six-year low.

It was a great week for the US dollar, which battered the euro and sterling into submission by week’s end.

But it was a good week for the Australian dollar which broke out of both a one month and then 15 month down trend.

Traders appear to be comfortable with the Fed’s now well telegraphed liftoff in mid-December when markets expect it will raise rates for the first time since 2006. But equally many are still warning that this might derail stocks, emerging, junk bond and other markets.

It’s a tough trading environment with good news one day and bad news the next. That’s the message Nick Savone, a managing director in Morgan Stanley’s New York equity division, highlighted in a note over the weekend.

Savone, who has just finished a round of Morgan Stanley investor conferences and client visits in Asia, Europe and the US, recently neatly summed up the current fractious trading environment.

“Normal” doesn’t seem to be “normal” anymore. Markets and investors seem to be trying to adjust as well, some days bad is good and some days good is good and more recently each day has part of a seemingly random and captivating walk of confusion, perhaps no better epitomized by the nickname dovishly hawkish for the Fed.

While many were focused on the numerous MS flagship conferences being held around the globe this week, markets quietly moved higher amid sporadic and “irregular” action across asset classes, especially commodities and equities. While downward pressures on commodities, ranging from copper to oil, drove prices towards their August lows, while equities globally seemed to have decoupled as they marched higher despite facing an almost nearly consensus Fed lift-off in December.

As markets have repeatedly shown us, there are no easy answers; perhaps this is a sign of trouble for equities or maybe a signal that commodities on are the verge of a sharp rebound, or this could simply be the result of a reduced proportion of commodity-sensitive equities within the major indices, which would suggest this decoupling could be sustained. Then again, as liquidity erodes into year-end separating signal from noise may ultimately prove to be an exercise in futility. As we all know, when one door closes another opens. Therefore, with the discussion around lift-off now ostensibly closed, perhaps understanding the implications that a reduced supply of volatility combined with a decline in liquidity will have on markets is the next great debate.

If normal isn’t normal, if markets, stocks, commodities, bonds and currencies are decoupling, and if traders and investors can’t separate the signal from the noise it looks like the last five weeks of 2015 might be just as volatile as the rest of the year.

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