Goldilocks Revisited

Goldilocks Revisited.

Comey, released his testimony today in word form before his expected testimony at the House Thursday. With no significant smoking gun or carcass, it would appear as though the testimony is but a storm in a tea cup and that is pretty much how markets currently see any events unfolding.

Markets appear to not be all that interested in the ECB meeting tomorrow which is expected to maintain QE and continue to be benign. Polling for the UK election starts in a few hours and this may cause some volatility although results most likely won’t be known until Comey has finished his Testimony. Researchers reviewing the exit polls suggest that Theresa May has a large fight on her hands and that her majority is under pressure.

JPM are looking to disrupt traders with what is known as a moon shot. Moon shot is being developed by an IT specialist company in the UK with the sole purpose of taking traders out of the equation and disrupting how the investment business will continue. The opportunity supposedly is that investors go to a platform and clear at the best price with the other platform participants. Sounds great in practice and for JPM they can take a clip without being exposed. These ideas always work well when everything is benign but when things get tricky we see flash crashes or no reaction to things where there should be a reaction. For me the final words of the interview were most chilling. The interviewer made the comment that when trading investment grade bonds i.e. a company like an Apple then credit research is irrelevant. That may be the case in 96 times out of a 100 but most recently we have Noble which one year ago was investment grade and is now rated CCC, Mannesmann was rated AA- (from memory) and from the time of a jumbo bond issue in 98 to three months later it went from AA- to BB+ because it was acquisitive and had not disclosed to the underwriters at the time it was in the process of massive acquisitions. Those acquisitions have since helped the company revive its fortunes and is now investment grade. Enron was investment grade before it went belly up.

People forget and what we all have to remember that a black box is only as good as the inputs. How does one evaluate whether a coder actually understands what it is that they should be doing. The other pertinent point is that markets have only been operating for a short time and that there are not enough data points to actually describe any movements. For instance, to statistically measure something to three standard deviations then you require millions of points otherwise all the observed points are somewhere on the bell curve but we don’t actually know where.

On the day stocks rose. The S&P rose 0.2% the Dow was up 0.18%. The Stoxx lost 0.1%

Commodities saw a down day. Gold fell 0.6%, the non-ferrous metals continued their selloff with copper down 0.21%, aluminium down 0.11%, zinc fell 1.05%and tin down 2.36%. Oil was off 5% as it was revealed the big disruptor in the market has been U.S. exports of oil. Apparently the U.S. has exported some 1 mio barrels a day this year. Oil closed at $45.76 a barrel. The glut will take some time to clear.

The euro was up 0.1%, the Bloomberg Dollar Spot Index gained 0.2%.

Bonds were marginally weaker, losing 2 bp to close at 2.17%.  The 2-year closed at 1.31% and the curve was steady. The closes for the curve are 2/10 85.90, 10/30 66.2 and 2/30 152.3.

The probability of a rate hike next week is about 95.3%, however the probabilities of rate hikes in the future have fallen significantly. The bond market, is betting there will be few rate hikes unless we see an increase in growth, and with no policies and no legislation CEO’s will be unwilling to commit to projects without certainty or knowing the environment.

Bill Gross commented today that bond investors were not being rewarded for the risks. Rates are now at levels seen in 2008 during the financial crisis.

The Aussie Market Today

Ahead of Comey’s testimony I don’t expect the Aussie market to do a lot. Equities may strengthen a little but with the potential of volatility investors may choose to wait. In which case the equity market most likely will weaken a little.

Bonds are likely to behave in a similar manner. I don’t expect too many traders will be looking to go long at this point. The Aussie 10yr vs the U.S. 10 year is now at 24 bp. For those traders that set the spread at 19 we could see some unwinding but it should not have too much of an impact.