Some odd price action in equity, currency and credit markets today which further supports the theory discussed earlier that we are witnessing a deleveraging process (Deleveraging Process). That theory is pure speculation but considering the events in Europe and the increased probability of a Greek default it is more probable than not that big banks are getting more liquid not less.
Deleveraging would also explain this very odd price behavior. For example today gold was very weak on the session down over 1% at one point. Oil and copper were also weak even though the USD had come off its highs very early in the session (remember a higher dollar would result in lower commodity prices and vice versa). Within equity futures small cap futures were down .4% including the after hours session while SPX and mid cap futures were flat. Treasuries were far stronger than equity was weak is yet another discrepancy seen today.
Something else to consider regarding the late day buying and how it can relate to deleveraging. If you are unwinding a position one of the positions (or legs) is your short equity hedge. You are going to cover your short equity hedge preferably at session lows but if they don’t present themselves you are going to cover then before the bell which may explain afternoon ramps. It also helps explain the very wild price action immediately after the bell where futures trade until 4:15.
This market is very unstable right now. Deleveraging is not an orderly process and not only gives mixed signals but also makes forecasting next to impossible. Adding to this instability is what looks like a high probability of a Greek default. Possibly within the coming days. There won’t be an announcement “we are defaulting on February 10 at 3PM local time.” They won’t wait until March 20 to default. No different than a person heading for a personal bankruptcy. They rack up more debt and then go to court.
Additionally just the mention of default will pretty much guarantee it happens. Think of Greek citizens worried about their deposits and how a switch from EUR based to Drachma based could in essence crush their balance. The worst thing that could happen now is a run on the Greek banks. Therefore a bank holiday is a high probability in Greece. Now that I sidetracked, few more market items to discuss (apologies for the soap box).
The vix did something very interesting this morning at the open. It gapped down to support within the descending wedge and then instantly reversed. Now that is how you want to see a reversal and shows how strong the level of support is within this pattern and thus increases the probability of it breaking out higher.
Below is an intraday chart showing this reversal and then a six month daily showing the descending wedge.
Treasury futures held in today and reversed part of Friday’s selloff. Granted volume was far below Friday’s level but key support levels were taken back. What is interesting is the 30 year has been showing more strength than the 2 year which broke out about a week prior. Whether this a simple change in duration based on ZIRP until 2014 or belief the biggest capital gains will come from the 30 year bonds is unclear.
Still the whole yield curve looks bullish at current levels but has not clearly confirmed higher or lower prices. In other words this is yet another asset class that needs to be watched closely in the coming days. In the event of a Greek default UST will finally get the safety trade which based on the MOVE (vix of the bond market) has not happened yet.
5 Year Futures
10 Year Futures
30 Year Futures
We must continue and spectate here. I continue to hold short but will not add here nor will I roll to another month just yet. I want to see more equity weakness and or signs that deleveraging is ending. I would like to see the USD finally break above the 79.60 area on a closing basis and the EUR below 1.3000 area. I would also like to see the AUD show some real weakness. It is just a monster lately but again very well is a false signal based on EUR/AUD as discussed earlier.
Images: Flickr (licence attribution)
About the Author
Macro Story is designed as a one stop source for all of your macro related news and data. From credit markets to economic data to geopolitics, you will find it all in a simple and organized fashion. Content is presented in a format that allows you to read as little or as much as prefered. Whether your goal is to do advanced research, a simple market overview or to become educated on macro subjects, the site has been designed with you in mind.