When Governments Say No More...

What happens then?

Yesterday’s price action was interesting I thought. The market tried and failed to rally. The consensus was that the home sales number took us lower and that’s a pretty convenient explanation. I felt then, and sent out a piece accordingly that the real reason for the sell off was the cutting of the size of the TAF and TSLF. Existing homesales is a volatile number and while it certainly didn’t help the market, I struggle to believe it was the driving force. It could however be just that over the coming months if the Pragmatic Capitalist is right.
Anyway, I was a little surprised not to see anyone really talk about the cuts to the Fed programmes. Jim Reid of DB mentions it this am and so does Macro Man but that’s about it. I guess there is a pretty easy argument that these programmes were far from heavily used so cutting them back shouldn’t make a difference…or that the Fed are winding things up because they think things are looking up, and to be fair there were some statements in the FOMC statement to that effect. However, I think the market is starting to wonder about what happens if/when the massive government intervention is no more. Where to from then? It’s not hard to argue that we are priced at the moment for a sustained recovery and anything short of that will lead to a rude awakening. Nor is it hard to argue that a sustained recovery is unlikely in a bailout free world, given the lack of pick up in the consumer.

As I type the headline durables number is very poor with the largest drop since Jan 09. Ex transport is flat but ex defense is -2.4% with a slow down in orders of non defense aircraft -42.2% vs +98.2% previously.

Sterling continues to get beaten from all angles while DXY is making hay. Predictably bonds are rallying and oil is being hit, as are the resource currencies. This is two days in a row now that risk off has been en vogue.

While it feels very much like this could be it, the end of the bull run or bear market rally or whatever you want to call it, we’ve said that many times before and been stung many times before. Also, bear in mind, we only sold off 1% on SPX yesterday and 1.7% on Estoxx and today’s moves aren’t exactly massive either. We wouldn’t bat an eyelid to those sorts of moves on the upside, so perhaps there’s an element of confirmation bias in our focus as the market moves south? It could be the beginning of the end of the bull (in every sense of the word), but I think it will take a few more down days and lower prices to really get the sellers to pull the trigger as trading downside momentum has been a treacherous business of late.