From former Lehman trader and macro commentator Mark Cudmore, who unlike the algos that have jumped from one extreme of the ship to the other, refuses to accept that yesterday’s market surge is indicative of a change in market direction and/or sentiment, or as he writes in his latest Macro Wrap…
One Strong Bounce Does Not a Bull Market Make
Equities haven’t bottomed just yet.
Some commentators have been swift to say Monday’s U.S. stock bounce shows the bull market is firmly back on track. But, as Aristotle once observed, “one swallow does not a summer make, nor one fine day.”
U.S. equity futures haven’t even regained last Thursday’s opening price. The tenuously optimistic spin conveys a sense of desperation from equity longs. Volatility is now much higher than two months ago. This means larger price moves. In both directions.
Risk-averse markets see the most powerful short- term bounces because there’s less liquidity and reduced conviction to stand in the way of momentum.
The fundamental picture hasn’t suddenly brightened from that which formed the backdrop to this column’s bearish call a week ago. If anything, it may have deteriorated:
- Credit spreads have widened further. Volatility moving averages are still trending higher, constantly restricting leverage capabilities and reducing risk appetite
- Financial conditions remain very tight. The rise in Libor slows market makers in closing arbitrage opportunities and further reduces liquidity
- Industrial metals have cleanly broken down, sending a negative signal on the global economy, and China specifically
Trade negotiations might eventually end well, but we won’t know for a few weeks, and it seems ridiculous to say that the situation looks better now than it did before Trump signed off on the latest round of tariffs.
Political risks abound, from the latest escalation in countermeasures against Russia to the fact that it’s increasingly possible we get a ruling coalition of the two populist parties in Italy.
A full trade war may be unlikely, global economic growth may eventually motor on and equity valuations may be long-term attractive. However, it’s impossible right now to have strong conviction in such views.
Equities may make record highs again later this year, but it’s very likely that more pain and panic is seen in the weeks ahead.