By Bloomberg macro commentator Richard Breslow
The U.S. markets had a rough day yesterday. Yet despite some of the very dramatic hyperbole used to describe it, traders actually seem to have taken it with remarkable equanimity. That is mature, in many ways admirable, and a big mistake.
There was no shortage of worrying and gratuitously unhelpful news that was blamed for the sell-off. And we’ve seen a remarkable consensus among commentators who tallied the likely catalysts. It is impossible to take exception with any of them. It was death by a thousand cuts. But, already, opinion seems to be running in favor of the it-was-overdone camp, with many looking for a Thursday bounce. And fully expecting soothing words from officialdom to see that it happens.
The debate will be over whether markets shrug things off or not. What the yield curves decide to do. But, to be honest, in the bigger picture that is largely noise. December has a unique way of simultaneously being both quite important from a trading perspective and not very definitive on the policy front
Talk becomes cheap this time of year. Decisions, let alone their implementation, are for the new year. And, all of the forecasts and upbeat messaging aside, we will just have to see how things transpire. No one should be trading currencies right now based on some view of what the ECB may or may not be doing next autumn. And if they were, despite the extant trade recommendations, the euro wouldn’t be here.
The far more important worry should be what to do about markets that are no longer capable of clearing business without exaggerated, and often frantic, moves. There is little promise that this will get better. And Tuesday was a prime example. There was no market-making in equities, just student body left. The enormous U.S. Treasury market was pushed around by computer programs chasing stop losses under the guise of just following momentum. And it periodically looked like the foreign exchange market decided to shutter rather than take part in the irresponsibility.
The ability and desirability to take risk will continue to deteriorate. The informational value of asset prices will be diminished. Any number of times during the course of Tuesday’s trading I was asked if A was causing B or was it the other way around. And the most likely correct answer was, “Yes.”
No, I don’t think electronic trading will ever be going away. That ship has sailed. And creating legislated latency in their connections is competitively no longer an option. Besides, regulatory capture will see to the status quo. Regulators don’t seem to be able to grasp or, as is more likely, admit their mistakes regarding market structure. It’s hard to be flexible if you also insist that everything you did was right and/or necessary. Certain futures exchanges think they can help by expanding trading hours. It will make matters worse.
What’s the solution?
No one knows in any form that is currently feasible. What’s the patch? No matter how much they deny it, it’s the never-ending presence of central bank puts. Whether they have or are going to go away seems almost quaint in the asking. It may be an exaggeration, but don’t you often get the sense that the Fed or the ECB read the political news first thing in the morning before looking at the markets?
Maybe the parameters fluctuate at times, but financial stability and the manufacture of desired results is going to remain a major policy tool. And the issues it is used to address will only increase over time. It is an inevitable fact of policy-making life. Can you name any major central bank that doesn’t do it? And we’ve fully moved from the genteel practice of government bond markets to a complete global macro approach. Everything is fair game.
It’s a shame that we have come up with so few ideas for how to remedy the situation. Made all the less likely as their trading desks become increasingly proactive. It also means, you will have declining ability to judge on any given day what liquidity conditions you will encounter. As a result, what happens tomorrow, or any day, will no longer be just statistically random.