Pincers

So what now?   Friday's price action was as stunning as the employment data was disappointing, and punters could be excused for wanting to take some time off to gain some perspective and clear their heads.   Unfortunately, that option probably isn't available to many; we're entering the sharp end of the year with many, many YTD P/L's in uncomfortable territory- while it's not quite "find the trade to bet your year on" time, it's not far off.

In perusing a few charts over the weekend, Macro Man was struck by a number of them that appear to be caught in the middle of pincer-like narrowing trendlines.   Some, like gold, still offer a little room to maneuver:

Others, like the euro, look like a resolution will happen soon.  The irony is that there is relatively little on tap data- or policy-wise this week to give it a jolt....then again, large moves often happen in the absence of an obvious catalyst.  The pincers are currently 200 pips wide and narrowing fast.

The tell on which direction goes might come from oil, where the pincers are tightest of all.  There was admittedly a false break higher last week- was this a bull trap or a prelude to the next leg of the reversal?   Either way, it seems likely that the environment of high volatility is like to remain with us.

Last Friday, you could almost hear the market pining for a hint of QE4 when Spooz were on their lows.  It's nonsensical, of course, but such is the outcome of the modern day "every asset owner's a winner" Lake Wobegon financial markets.

In that vein, Macro Man was intrigued to see that after Friday's number most eurodollar curve spreads collapsed to their lowest levels in nearly 2 years.   The generic 2nd vs 10th contract spread, for example, is now at just 99 bps, pricing LIBOR less than 1% higher between March 2016 and March 2018.  By way of comparison, the median dots in the infamous SEP plot rise 225 bps between the end of 2015 and the end of '17 (not an exact match on time frame, but close enough.)  Fading this now is a bit of a falling-knife play, but the pre-taper low of 81 bps will look nice as a stop-loss risk parameter if we get another 5-10 bps lower.

If the flattening continues, though, pretty soon the Fed is going to run out of room to maneuver, because the market will be pricing nothing at all.  Between now and then, they're going to have to make a choice: do they continue to kow-tow to the whims of the market and its propensity to throw the toys out of the pram, or do they start delivering a tough-love type of lecture that market pricing doesn't reflect the Fed's intentions?

It's kind of ironic, really.  For years, the market has assumed a kind of omnipotence that central banks have over asset prices, whereas latterly, it is the market itself that seems to hold all the power over the Fed's lift-off decision.  In reality, of course, neither is all-powerful or all-knowing, and the longer that each side attributes these traits to the other, the nastier the surprise will be when reality bites.