Financial Market Liquidity Is Frozen

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Macro Man had a new experience yesterday, playing golf on what can only be termed an ice rink. Never before has he shanked a fairway iron because his right foot slid on the ice (there are normally more prosaic reasons) or seen a beautifully-arced eight iron shot hit the front of the green and bounce like a ping-pong ball off the back.

Macro Man and his companions were only the only frozen things in the market, however. Friday’s US employment report confirmed that hiring across businesses has been well and truly frozen, as November job losses were the worst since December 1974, when Macro Man was but three years old.

Unsurprisingly, the lowest stratum of the labour force is suffering the worst. One of Macro Man’s favourite indicators is looking at US unemployment rates by educational cohort. The u-rate for those workers who failed to complete high school has now breached 10%, well in excess of the peak during the last recession. That rate troughed in late 2006, providing an early warning of the waning momentum of US growth. Somewhat curiously, the unemployment rates for the two lowest educational cohorts remain below their peaks in the early 90′s recession, despite the fact that these workers are ostensibly those who are competing with Chinese labour. The moral of the story? There’s probably more pain in the pipeline.

Also frozen this morning is financial market liquidity. Macro Man is looking agog at his futures trading screen: Bunds are two ticks wide, 40 up, and US long bonds are two ticks wide, two lots by one lot. Markets (fixed income, equities, and currencies) have moved quite a bit this morning, but it would appear to be more a function of illiquidity than a sober re-appraisal of market fundamentals.

Sure, India cut rates and the US president-elect has promised to restore American prosperity by installing new windows in public schools…but colour Macro Man sceptical that this is a reason to buy stocks. Yet there was the Eurostoxx future, up 7% on the day when Macro Man walked in. As Macro Man keeps saying (with a regularity rapidly approaching ad nauseum), seven percent rallies don’t happen in bull markets.

All this having been said, Macro Man does have some sympathy for the sell off in bonds, however poor the liquidity. US long bonds have rallied 20 point in three weeks, essentially immediately pricing in the imposition of quantitative easing. While this may ultimately end up being the right trade, Macro Man can’t help but think that it’s come too far, too fast.

It’s broken the uptrend line of the last ten points, so technically looks ripe ffor a bit of a pullback. Macro Man’s had a bit of a flutter, in size appropriate for a market that can trade 2 ticks wide, two lots up.

Tempting as it is to just freeze all risk until the new year, December often presents opportunities for those in a position to trade. So Macro Man is continuing to make a few bets, even if the market is as hard as the greens he played on yesterday.

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