It seems before the paint was even dry as to how they’ll proceed after ending QE, a decision was made to apply yet another coat in an attempt to cover any previous “blotches.” The issue that seems lost is: This was their first opportunity to move out from the proverbial “painted themselves into a corner” dilemma, and use any remaining “paint” that could have covered their tracks to instead: go about and lay-down a second coat backing themselves back into the very same corner only this time an even tighter one!
This in-turn provided the markets with the obligatory narrative as well as fuel to then “paint the tape” in a feeding frenzy of HFT induced stop running and price setting action during what’s known in the industry as “Quadruple Witching.” (i.e., when the indexes and more settle prices on a quarterly time period.)
This period of price settlements has always been known for its volatility. However, the price movements within the currency markets alongside were far from ordinary: They were both spectacular – as well as frightening. But don’t look to hear about any of that from the “everything is awesome” financial media channels. All you’ll see there is “Look its a bird. It’s a plane. No Its…Everything is awesome again!” as the markets rallied higher in unison.
In a previous article I opined:
“The Fed. as of today has pulled the plug on QE, and implied it’s time to raise interest rates. All at a time the global economy is showing just how addicted it truly was to the Fed.’s QE policy of “free” money along with near zero interest rates leaving the Fed. with the difficult choice of exactly which policy are they to enact. For both will have dramatically different results.
One is to go back on all they’ve said, admitting they got everything wrong via the signaling that not only will interest rates not be raised; but in addition the possibility for more QE is at the ready, sending critics of the Fed. spiraling into a concerted effort demanding both an audit as well as hearings. Or…
They stick to their guns, signal the intent to raise rates sending the global economy and markets into a tail spin of unraveling carry trades, currency wars and quite possibly a full-blown currency based Armageddon.”
Once again as proved by this latest FOMC decision as well as the following press conference, just when it seemed they would (and needed) to do one or the other: They did a little of both! Again, just when you think the Federal Reserve’s messaging couldn’t get any more muddled, they show beyond all doubt: Oh yes it can!
Not only did they signal they weren’t going to raise interest rates any time soon, they went out of their way to placate the market signalling “patience doesn’t mean impatient” and since they’re now “data dependent” you can rest assured by the latest signalling via the Atlanta Fed. the “data” currently signals: Hike up your glasses and have more punch because the probability of us hiking rates has the chance from zero to none!
And with that some of the most important market segments for both stability as well as liquidity came unglued and swung in price movements showing just how precarious as well as dangerous they’ve truly become. (As well as adulterated I might add)
Following the decision the markets raced higher negating the previous declines to once again inch within spitting distance of never before seen in the history of the market highs. All the while simultaneously the bond markets ran in unison; just as hard, just as fast. This is a warning sign to any veteran trader.
It’s one thing for the perceived “risk off” or “safety trade” of bonds to display some strength during an equity market rally. Especially when that rally is held against a backdrop of deteriorating macro data. There’s always some divergent correlation for, or against, present within the markets regardless. However, to have both markets move (i.e., both meaning all; as in, across the board in both equities as well as long dated and short-term bonds) where everything rose in lockstep? That’s unsettling to say the least in my opinion. And the divergence in common sense price action didn’t stop there.
The U.S. Dollar. That little sheet of paper aka “The worlds reserve currency” (WRC) moved in ways that made one think they were watching a biotech stock that just received FDA approval to then minutes later have it pulled. It was absolutely breathtaking. The dark side of that move also showed just how unstable this market is becoming.
Currencies move in what’s known as “pips” (e.g., 1/100 of 1%) but for simplicity’s sake let’s just say they bounce around up and down in moves of pennies. When they move violently up or down in the equivalent of say dimes and quarters – people take notice. A violent sustained move (i.e., within the course of a full trading day) of just 1 dollar – you’ve got not only traders, but global corporations, as well sovereigns watching with explicit eyes for there is not only the wealth of companies on the line, rather, there may very well be “the wealth of nations.”
So how does one think someone with billions upon billions (if not out right trillions) of monetary exposure felt as they watched the world’s reserve currency swing back and forth gyrating in multiples of dollars? Not in weeks, months, or even days – but hours! All I can say is: Welcome to HFT meets USD. Just remember to buckle up and hold on for dear life – and account balances. This ride is going to be jaw-dropping!
The swings in the currency markets are only now being sorted out as currency traders come to grips with what took place this week. There are reports detailing in graphic display such as this from Zero Hedge™ “Dollar Flash Crashes…” where the Dollar in the most liquid market on the planet is now showing signs it’s no more stable or less prone to manipulation than any penny stock. Don’t look for any solace in that other once perceived equivalent of “liquid” markets U.S. Treasuries either. It seems they too have fallen into the same debacle.
This latest round of index settlements along with the Fed.’s newest mumbled attempt of explicitly straddling the fine line of yes, no, and maybe has shined a spotlight directly on glaring issues for anyone willing to look. Problem is – no one wants too! And it’s not just the Fed. For what happened in the world’s most heavily traded as well as capitalized stock known as Apple®, what took place on Friday’s close should be ringing alarm-bells throughout the S.E.C.
Within the closing minutes shares were pummeled to then only accelerate to once unimaginable selling volume within the remaining seconds of the trading day. The world’s most valuable company had nearly $10,000,000,000.00 (that’s 10 billion!) of its market cap erased in what can only be described as some form of goal seek-ed price peg. (You can view the details as laid out by Nanex™ and reported via ZH here “The Farce That Is…”
Like those “winners” in the closing moments of the day that became “losers” in nanoseconds we’ll just have to wait and see if this type of activity is not only going to be tolerated, but rather promoted as “good for the markets.” Because as we that question are always quick to be reminded: HFT is “providing necessary liquidity for the benefit of investors everywhere.” Unless you’re the one on the other side of that HFT “liquidity” trade. Then you just provide the liquidity for HFT profit.
It’s one thing to be on the losing side of a trade where everything you thought to be correct based on acumen or assumptions goes against you regardless of how well you thought the odds in your favor. That’s trading. However, when you also have clients money (as in the cumulative world of Hedge Funds, Pensioners, Personal or managed 401K proceeds , et al) on the line – and quicker than you can pop the champagne bottle in a celebration of advice and job well done; the most predatory and parasitic creature to ever gain control over the markets comes in and swipes those perceived profits not only your account but possibly the accounts of “widows and orphans” into theirs in mere nanoseconds? That’s not “trading” or “investing”, or anything else remotely resembling the two. That’s thievery in my book. Plain and simple.
The issue is not only is all this currently being allowed to run unencumbered within the premise of “legal.” But if you dare bring up allegations? You’re met with “you just don’t understand.” Well maybe I don’t. But I do know this: It may be legal – but that doesn’t make it right. And all of the negative aspects associated with it are just beginning to gather more steam. And the consequences could be unimaginable going forward.
How well does one think this is going to go over in the minds of sovereign nations as they sit back over this weekend and contemplate the same happening in the FX market where they have billions upon billions of dollars at risk? Does one think any nation, or let alone group is going to tolerate such “volatility?” Not on your life. And for proof all one needs to watch is the growing onslaught of announcements now coming on a near daily basis as one country after another announces it’s joining China’s formation of an A.I.I.B. (Asian Infrastructure Investment Bank)
The Dollar’s stunning movements along with the reverberations wrought across the currency pairs globally, together with the muddled messaging emanating from the Fed. is going to have everyone (and I do mean everyone) weighing the “new currency market player” vs the now perceived, as well as demonstrated “risks” in staying beholden to the current WRC. And just like in retail I believe currency markets share a very important attribute: Once you allow the customer to perceive, let alone conclude, there’s an alternative to you – the damage to market share may already be inevitable as well as irreversible.
If you want an analogy to weigh the impact of such things and how fast they can turn, all one needs to remember was how just a few years ago there really was no alternative to: a Blackberry®. Today, Blackberry’s are refereed to as: “What that?” That’s how fast any market can turn. Think I’m off base? How about this one that’s more market centric.
In the same time period as the above example there were these places called “pits” where “traders” would partake and bid prices of buy’s and sell’s in an open forum of publicly witnessed honest price discovery. Today, they’ve all but been replaced by HFT electronic algorithmic trading vehicles where experience in actual trading is eschewed in preference to math and coding prowess. Don’t let this last example go by without really understanding the implication held going forward.
In a way I think it’s fitting to close this article with a few statements given by the recently retired head of the Dallas Fed. Richard Fisher where he expressed his concerns about the markets and more in a recent interview with CNBC™ veteran Rick Santelli.
In it he expressed two points which I feel shows just how precarious as well as outright dangerous the markets have become. In response to questions posed by Santelli two points in my view were both salient if not downright prophetic. The first: “Well, what worries me is how totally lazy investors have gotten, totally dependent on the Federal Reserve and I find this to be a precarious situation.” The second: “Are we vulnerable in my opinion to a significant equity market correction? I believe we are.”
I couldn’t agree more and I’ll add my own last point to his. Not only has the Fed. painted themselves into an even tighter corner – they’ve left no clear path as to now kick the empty can.
What transpires from here is still anyone’s guess. For we truly are in uncharted territory. Again!
© 2015 Mark St.Cyr