We knew there would be a bounce after last night’s news. When six separate central banks coordinate an effort to amp up global liquidity, you’re going to see people getting excited. From Forbes:
The U.S. Federal Reserve, after a similar effort in September, will “lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.”
Wednesday’s move from the Fed was matched by corresponding actions from the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank. The new pricing applies to operations conducted as of Dec. 5, and the authorization of the swap arrangements has been extended to Feb. 13. (Read the FOMC press release here.)
After weeks (or, more realistically, months) of the financial world bemoaning the inaction of governments and inadequacy of solutions pertaining to the Eurocrisis, such a rescue has fostered a sense of elation in the markets. Across the board, we’re seeing prices jumping substantially. How substantially are we talking about?
Palladium shot out of the gates like a rocket this morning, but right now, Copper is leading the pack. Generally speaking, the collective moves have been impressive- as always, with a handful of exceptions. Some were expected to fall (flight to safety plays like the U.S. Dollar and U.S. treasuries), and others are surprisingly responsive to traditional fundamental influences (like Cocoa falling on news of higher production). Others are anyone’s guess. Natural Gas, for instance, continues to make us believe it is a flight to safety play more than a risk on asset.
On the managed futures side of things, there are probably a fair amount of managers out there doing a face-palm and crying, “Not again…” The severity and abrupt nature of this up swing after a generally down November seems vaguely (by which we mean very) reminiscent of the early October swing- which, as you’ll remember- was also very unkind to most CTAs. There are several managers we track that came into today short Copper, Coffee and the S&P- all markets that have been skyward-bound today. For some of the multi-market programs that were posting gains earlier in November, the month’s end may wind up pushing them into the red- which is not what any of us wanted to see.
Even with this movement, there’s a few things to remember. As always, one day does not make a trend (is there an echo in here?), and it’s still early in the day. It’s entirely possible that some of this pressure will deflate as the hours tick on, especially since we know how responsive the markets have been to headlines. Perhaps most importantly, we have to think about the durability of this good news. What do we mean? The same Forbes article referenced above hits the nail on the head:
While the effort to provide more liquidity may temporarily soothe the symptoms of Europe’s debt crisis and allow financial institutions easier access to funding, it does little to address the underlying roots of overburdened governments that need to be propped up while they drastically cut spending.
In other words, this effort is a bandaid. Now it’s simply a matter of waiting to see how long it takes the markets to bleed through its coverage, or whether it actually has a chance to scab over. Given the dysfunctional Eurozone dynamic these days, we aren’t holding our breath on a speedy recovery. That being said, the markets aren’t exactly behaving logically these days, so who knows?