The Market Shifted-Did You Feel It?

• Posted by Jeff Carter
• on April 18th, 2011

The stock market ($ES_F, $NQ_F) has been trading off indicators since the melt down in 2008. It’s upward climb from the depths of March of 2009 have little to do with actual economic activity, and more to do with government programs and currency valuation ($6E_F, $USS_F). All through 2009 all I heard was look at the cheap dollar, it’s good for exports, buy the market. That carried over into 2010. If the dollar was down, you could just about count on the stock market and all commodities being up. Programs like quantitative ease allowed people to say the market will go up as long as the government buys it.

There has been a subtle shift and change in psychology this year. It’s almost imperceptible. Interest rates are where its at. ($ZB_F, $ZT_F, $ZQ_F, $ZN_F, $ZF_F, $GE_F, $ZQ_F ) Volume in both options and futures has been ticking up.

$CME is where most of this stuff is traded.  They have competitors in the $NYX and ELX, but the competition does very little volume.  Here is $CME’s monthly report on volume. “In March 2011, CME Group interest rate volume averaged 6.6 million contracts per day, up 33 percent compared with the prior March. Treasury futures volume averaged 2.7 million contracts per day, up 48 percent compared with the same period in 2010, and Treasury options volume averaged 329,000 contracts per day, up 34 percent. Contributing to the Treasury options growth, the newly launched weekly Treasury options grew to 14,000 contracts per day on average in March, up 28 percent from February 2011. Eurodollar futures volume averaged 2.7 million contracts per day, up 32 percent versus March 2010, and Eurodollar options volume averaged 767,000 contracts per day, up 8 percent.”  The hot money is starting to trade interest rates.

The investigation into manipulation of the LIBOR rate continues. If anything comes from it, it should drive STIR volumes higher, as banks have to hedge rather than manipulate.

If we look at the US Treasury auctions of last week, none of them were well received except the 30 year re-opening. Rates in China, India and Europe are ticking up. Savvy investors in the US know the gig is up for the Fed, and it’s only a question of time. If you aren’t trading interest rate futures, you should start dabbling and getting comfortable with them. It’s where the action will be for quite some time when the Fed dam on 0% interest rates bursts.  When the Fed moves, the volume increase in interest rate futures volume will be exponential.

 

UPDATE

wow, had no idea when I posted this that S+P was releasing a US Debt rating.  Treasuries got massacred.  Here is what they said,

“We have affirmed our ‘AAA/A-1+’ sovereign credit rating on the United States of America.

• The economy of the U.S. is flexible and highly diversified, the country’s effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
• Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
• We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns

With this as a summary,
“The negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years. The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.

Some compromise that achieves agreement on a comprehensive budgetary consolidation program–containing deficit reduction measures in amounts near those recently proposed, and combined with meaningful steps toward implementation by 2013–is our baseline assumption and could lead us to revise the outlook back to stable. Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating.

Standard & Poor’s will hold a global teleconference call and Web cast today–April 18, 2011–at 11:30 a.m. New York time (4:30 p.m. London time).”  For dial-in and streaming audio details, please go to www.standardandpoors.com/cmlive.

Obama’s address on the debt and budget of last week seems even more hollow now.

thanks for the link, eWallstreeter

UPDATE 2

Politicians didn’t fail to notice the S+P downgrade.  Here is what Rep. Peter Roskam said, “Today’s S&P change in its outlook for the U.S. to negative is the latest ominous warning that we can’t wait any longer to fundamentally address Washington’s spending and debt. While President Obama is advocating for the Washington status-quo, S&P’s warning is clear: the cost of waiting will have grave consequences for our economy and our kids’ futures. There is a way out of this. House Republicans have already passed a fact-based budget that would fundamentally lower spending, save crucial programs, and create a debt-free future for generations to come. Imagine what we could pass on to
our kids and grandkids: a future free of crushing taxes and indebtedness to China. The urgency for action could not be clearer. I urge the White House and Washington Democrats to eschew the status-quo and to join us in meaningfully reducing our spending and debt.”

It’s time to end Sesame Street Economics.  Everyone knows that 2+2=4.  You cannot change the net present value tables.  You can mess with accounting, and that’s what people did up until the Ryan Budget of last week.  The Ryan budget is the only serious budget with real numbers out on the table.  Everything else has been smoke and mirrors.

 

 

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