Some Thoughts About The Week Ahead

Four central banks meet in the week ahead, and non-manufacturing purchasing managers surveys will be reported. While they are worth assessing, they are unlikely to be the key to the movement in the capital market in the week ahead.  

Some may argue it is always the case, but in the days ahead, market psychology mediated by market positioning may be particularly important.  

The low volatility bemoaned by some banks, hedge funds, speculators and their sympathizers in the media is actually a boon for many asset managers and corporations. Many investors recognized that the low volatility was not agnostic to market direction.  The low volatility was a function of a steady-to-higher equity and bond (lower bond yields) markets.  

It was also a function of narrow ranges of movement among the major currencies. Consider, for example, that according to Bloomberg data, the dollar-euro pair, the most actively traded currency pair in the more than $5 trillion a day market, was confined to less than a fifth of a cent in two days on the second half of July. 

Unambiguous signs that after recovering from the contractionary fluke in Q1, the US economic momentum has carried into Q3.  Economic conditions consistent with the Fed’s mandates are being approached.  Various price measures have firm, and although the labor market may not be healthy (“significant under-utilization” is still evident, according to the FOMC statement), it is on the mend.

This saw the US 10-year bond yields recovered from around 2.45% to 2.60%, the highs since the start of the month.  The equity markets turned down, and the magnitude of the losses inflicted technical damage.  The dollar appears to be breaking out against both the euro and yen.  This was in many ways what investors had generally expected this year.   The implied volatility in the capital markets rose.   Volume appears to have picked up as well.   Turnover on the NYSE moved above its 100-day moving average on July 31 and August 1.  

However, investors have been repeatedly frustrated by the lack of follow-through that characterizes range trading in the currencies and are fearful of another setback. Similarly, US Treasuries rallied, sending yields back below 2.50%.  Although the S&P 500 finished last week at its lowest level in nearly two months, it managed to finish off the intra-session lows and back near the middle of the day’s range.