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"No Panic" - Why For Once, It Makes Sense To Watch What Isn’t Moving

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As Bloomberg's macro commentators point out in explaining the latest "BTFD" shift in sentiment, markets have bounced from yet another bout of volatility, but the question remains if the latest selloff in government bonds and stocks is a healthy correction or the beginning of a bigger adjustment. While there may not have been one single trigger, Bloomberg adds that "the realization that central banks may have already used most of their accommodative tools has contributed to the weakness. For now, technical signals point to a rebound."

 

So what should traders do until we get the latest trial balloon out of the BOJ (Reuters and Kyodo have been especially active overnight, releasing story after story about what the BOJ may do to gauge market reaction, which considering where the USDJPY is right now, has not worked out too well). As a reminder, the USDJPY jumped then dropped overnight as BOJ officials were said to favor stepping up JGB purchases if the central bank expands stimulus, as previewed here first last week. A Bloomberg survey showed a slim majority of economists anticipate expanded easing and a rate cut is the most likely option. Meanwhile, the Nikkei reported BOJ will place further negative rates at focus of policy and will discuss trimming purchases of bonds longer than 25 years.

 

For now, however, the prevailing sentiment at least this morning is one of "No Panic", as further explained by Bloomberg's Richard Breslow in his note below, according to which "For Once, Makes Sense to Watch What Isn’t Moving." Here's why:

 

Markets are certainly on the move. For the first time in a long time, traders are relearning that location really does matter -- if you want to survive the trade.
Suddenly, “extend duration” isn’t the answer to every question. Especially when the greater fool takes a holiday.

 

 

 

Contributing to the mix has been a slew of well-known institutional investors expressing real (and real estate) investment caution. Certainly showing greater caution than those analysts who’ve been institutionalized by the post- crisis global environment.

 

 

 

What makes this episode all the more interesting is that it’s the no-brainer trades that are leading the way down. Yield curves are steepening, equities slipping and emerging markets testing important levels

 

But the infection hasn’t been universal. And that’s where you should be looking to get some measure of the size and scope of what’s going on here.

 

 

 

One market that fits this description and is well worth watching is corporate credit. Spreads have been responsive to daily moves in other assets, but not showing the same impulsive movements and panic. If anything, investors are picking and choosing corporate spreads by the issuer and deal structure, rather than painting the entire sector as a class.

 

 

 

This is actually a very healthy sign. And a possible indication that it’s the long-end of sovereign credit markets that are the issue.
We may be going through a period where the rotation in portfolios just has to be digested. Make friends with your local credit specialist, because these spreads will be an important tell on what is really going on here and how far it may go.

 

 

 

It’s hugely important whether this is a reflection of people adjusting duration as they wake up to the systemic dangerousness (think pension funds) and ultimate futility of long rates being so low. Or if it’s representative of a world getting ready for the next big short.

 

 

 

For the moment, respect technical levels. Even with all the intra-day volatility, they have been acting as important inflection and stopping points across the board. MSCI Emerging Index has stopped falling right at its 55-day moving average. The MSCI Currency Index just slipped below its average. Both are close but giving out conflicting signals. Let them tell the same story and then you can be a hero.

 

All we can add to Breslow's comment is that the reason the corporate bond market has been a sea of tranquility next to the raging sovereign bond sea, is that for the time being nobody is willing to challenge the ECB and BOE - and certainly not the central banks themselves - in their attempt to corner and nationalize the bond market. However, as we will show shortly, this may soon change.

 

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