Volatile Markets and Vanilla Trading Products
After such a huge sell off yesterday we can expect the opening levels to be attracting buyers hunting for the ‘bottom’. Yesterday’s late evening action saw the FTSE being quoted down at 3855 at one point before the late, late, rally in the Dow Jones saved the day.
For all that, the FTSE 100 is called just about unchanged in pre-market action at around 4035. The price volatility over the past three weeks has been extreme even in comparison to previous months this year but (and it is a big but) the FTSE futures have now bounced violently off the mid 3800′s three times. Triple bottoms (tops) are a classic technical indicator of a possible turn in the markets fortunes and investors will be hoping that this time is no different.
Virtually every market sector has now been dragged into the extreme volatility with Bonds, Commodities, FX and Equities all experiencing a massive move every day. At some point (and it cannot be far away now) we will get some form of dealer exhaustion as the survivors retreat to lick their wounds and await easier times and the dead are carried out for burial. Trading volumes are in almost terminal decline with the exchanges indicating that turnover this month may be the lowest for many years. Private investors are seeing the opportunity for their day in the sun as small volumes are moving prices like never before. On the 3mth interest future markets there used to be thousands of contracts on the bid/offer spread. Nowadays you are quite likely to see just 20 to 50 on either side. Two years ago a sell of 3000 Eurodollar futures would have been immaterial, today you might actually move the ‘Global’ Libor fix for the day with such a sum.
The allocation of bank balance sheets to proprietary trading units has been decimated and with many units now having to justify their existence to unsympathetic Treasury civil servants (across the world) the days of the ‘big swinging dicks’ may final be over. Old fashioned Government Bond Sales and Trading desks (which I grew up on) will now be the place to be as Central banks start to issue huge tranches of debt. The retrenchment towards Vanilla products will probably be the story of the next few years.
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