Political turmoil is having an out-sized impact on markets these days and it’s hard to not get sucked into trading on the latest political news flash or tweet. It’s not that the tweets and news flashes can’t move markets...they obviously do...but I want to trade the market not the tweet.
The attack on the Saudi oil processing facilities caused WTI to jump $8 to ~$63 when markets opened Sunday afternoon...but within a couple of days WTI fell back ~$5 to ~$58. The price jump was attributed to a risk premium build, fears of more attacks and/or retaliation, talk of $100 oil, as well as to the assumed loss of 5% of the world’s daily production for an indefinite time.
We’ve seen dramatic price reversals across markets since the Labor Day weekend...especially in the bond market where yields had their biggest one-week jump since Trump’s election.
The Canadian dollar up a cent this week trading at 76 cents after the Bank of Canada held rates steady on Wednesday and we posted an incredibly strong 81,100 gain in employment for the month of August. This move higher in CAD brought it to the middle of the small 74 to 77 cent range it has traded within this year.
Going into the Labor Day weekend, after a very choppy August, and ahead of the “back to reality” moment that hits every year when trading resumes in September we have the US Dollar strong like Big Bull...the USDX is at 28 month highs and the St. Louis Fed Trade Weighted USD Index is at All Time Highs.
A trader’s job is to imagine how a market might be different...at some point in the future...from the way it is now. But before trading on his opinions about where the market may be going he needs to see signals that confirm his opinions. He also needs to be aware that his opinions may cause him to “not see” other signals that contradict his opinions.
Markets continue to aggressively reprice interest rates lower. There have been massive capital flows into bond funds, the US long bond has hit a record low yield and the sum of negative yield bonds continues to rise.
Long bonds is the most crowded trade in the world. It’s been a hugely profitable trade the last 9 months but the rally may be over. Bonds have been the epicenter of the interest rate repricing trade and if bonds start to fall then the “positioning risk” in those markets will create “mean reversion” trading opportunities everywhere.
The market had a lot to digest this past week and thinner-than-normal mid-summer conditions may have exaggerated the moves...but it still feels like there’s a “sea-change” happening here that may be foreshadowing bigger moves to come.
The mean reversion trade: For the past few weeks I’ve been musing that the “irresistible force” that has moved all markets has been the aggressive repricing of future interest rate expectations since last November.