This week profiles as one that contains a bunch of potential minefields that could challenge the market’s prevailing view on what’s to happen with major market-moving events.
The ECB meeting is one of the more obvious ones, what with investors expecting for some time that the euro would push higher and higher on the expectation of an improved outlook in the economic situation there.
That changed somewhat abruptly last week when Bundesbank President Jens Weidmann came out with some rather dovish comments that threw people for a loop. This looks like there could be some kind of situation where people are positioned against a rebound in the euro, only to be disappointed by the lack of action from the ECB should it go down that way.
The same can be said when it comes to events like Friday’s jobs report. The market still has to try to suss out the likely reaction to this and weekly positioning figures that show the market’s short position in five-year Treasury notes getting bigger than a week ago, as for other parts of the yield curve. A modest long position in two-year futures turned into a short position last week; long positions in the 30-year contract were trimmed, and investors extended short positions in the five- and 10-year area as well.
That seems to set up nicely for a jobs-report-weather-payback kind of deal this Friday, but it’s entirely possible that this won’t happen, and we’ll have another weak result on the jobs front. The latter would certainly reverse a lot of these bets and make for some volatile action as investors try to figure out what’s going on.
Either way, Jason Goepfert of Sundial Research points out that the positioning in the five-year hasn’t been this short since 2005, and even then, that short position was eventually overrun by unexpected consequences that resulted in a multi-month rally – so let’s be extra careful out there.
Ukraine’s situation remains fraught with concerns about Russian designs on part of the Ukrainian mainland following the annexation of Crimea.
And herein we have a third possibility of surprise, where tensions worsen, the price of oil spikes, and the European economy, much more dependent on Russian engineering than the US or the Far East, feels the pain, again, hitting the euro.
And then there’s China. The Financial Times reported bad loans written off by China’s biggest five banks increased by 127 percent in 2013. This is an ugly situation that will stoke concerns about a potential debt crisis, one made worse by the strange nature of many Chinese loans, whereupon deals made to borrow in dollars were backed by copper – which has been sinking as investors sell the metal for collateral.