Bonds and Stocks can’t both be right and like FX low volatility may be a mirage

June 4, 2014

As dangerous as it sometimes feels to be a Turtle style trader it is still my favourite no discretion trading style and one which I reckon time constrained traders should follow.

Normally Turtles lose money in low volatility environments because they get stopped in and out of trades when ranges break and then reverse. Such has been the case in FX for some time now and likely they were stopped into bond longs last week which are looking wobbly now.

But the secret in that is that as Minsky told us volatility transitions as low volatility sets the scene for a move to high volatility. That’s where I reckon global markets are at the moment and while the wrangling in the US Stock market continues and while the the bulls are clearly winning with markets near all time highs the chorus of disquiet hasn’t gone away.

My colleagues at BI US reports this morning that

“Societe Generale’s Albert Edwards writing today that “the US profits margin cycle has begun to turn down at long last.” But Goldman Sachs’ David Mericle took the other side: “We think it is premature to call the Q1 decline a turning point.”

Turning points are never easy to call – hence the argument – but Edwards thoughts will resonate with many traders.

If you can’t or don’t want to trade like a Turtle there are always options.

So in the end after another days battle US stocks were down marginally with the Dow off 0.13% at 16,722, the Nasdaq fell 0.08% to 4,234 and the S&P 500 was down just 1 point to 1,924. This is interesting in the context of very solid ISM New York (55.3) and Factory Orders (+0.7%) but perhaps traders were more worried with Kansas City Fed President Esther Georges comments that “While some have argued the aggressive easing actions taken during the crisis required courage, both from a policy and political standpoint, I expect the normalisation phase will require a great deal more.” That is a gauntlet!

In Europe more news suggesting the ECB must act tonight with EU CPI printing 0.5% versus 0.7% expected. The trade was fairly light and although most European bourses were off the lows of the day the indices we follow all ended in the red. The FTSE was down 0.41% at 6,836, the DAX fell 0.30% closing at 9,920 and the CAC dropped 0.26% to 4,504. In Milan and Madrid stocks fell 0.64% and 0.47% respectively.

Cognitive dissonance!

But while we might not focus too much on bonds it is where the action is in a macro sense. It drives currencies, it drives stocks and it drives the economy. It’s not stocks that are king but bonds.

So the big news was the overnight sel loff in US bond markets from the short covering induced low of 2.40% in the 10 years last week. Overnight, whether on the back of Esther Georges comments or the really solid rise in car sales reported by the manufacturers, 10′s rose another 7 points to 2.60%. That is a huge round turn in a week and belies the current market “low volatility” meme. Last nights move in the 10′s was a 2.83% capital loss.

The washup locally of all the above is that on Australian markets overnight the Jun 10 year bond contract fell a solid 6.5 points o 96.22 taking rates up to 3.78%. The 3′s were also higher in yield closing this morning at 2.83% up four points. On ASX futures the June SPI 200 contract was up 10 points (iron ore rose a little) to 5490 bid.

On currency markets USDJPY soared back above 102 and sits at 102.53 while elsewhere and once again incongruously with the ECB tonight the Euro rallied back to 1.3625. Sterling sits at 1.6748 and the Aussie is doing a bit of range trading after hitting a high in the 0.9280′s yesterday before settling back to sit at 0.9263 this morning.

Nymex June crude is up 0.36% to $102.84 and gold sits at $1,244.70 this morning while silver is at $18.76 oz. Copper went backwards and is at $3.15 and iron ore futures for September delivery rose 25 cents to $93.50 tonne. On the Ags there was carnage with corn down 1.61%, wheat down 1.29% while soybeans dropped 1.32%.

On the data front today Australia’s Q1 GDP is out at 11.30 before a raft of global Services PMI’s tonight and EU GDP for Q1. In the US in the run up to non-farms Friday the ADP employment report is out along with the Fed’s beige book early tomorrow morning.

I haven’t put any MT4 charts in today as it’s all a bit boring and would feel made up :S

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