Futures Trade Desk: The New Normal

The New Normal

The US debt ceiling will be raised (again) from $15.2 trillion to $16.4 trillion on Dec 30th in a political shell game that has no apparent ending. Once attention turns away from Eurozone banking system woes and bond market debacle, the impact of terrible US fiscal house-keeping may well be addressed by vigilante moves that cut equity and Treasury fair value in quick time.

In a strange twist of market mechanics, Eurozone banks are taking the funds made available to re-balance risk exposure under the ECN Long Term Repo Operation (LTRO) at 1% cost and are putting most of it back on deposit in the ECB overnight deposit fund at 0.25% gain.

European banks are taking cash from the ECB and instead of putting it to work in the open market are putting it back on deposit in their own name with the ECB, and are paying 0.75% to do so. Watch out below when common sense hits home; this is a red-flag that all is not well with inter-bank and sovereign risk sentiment and outlook.

Once momentum builds and year-end completes, the picture may become clearer in regard to the direction that equity indices, bullion, bonds, and commodities will go. The path of least resistance seems to be lower at the moment, helped in part by the fact that forward guidance on 2012 Q1 earnings reports has not indicated growth and expansion.

Buckle-up, especially those who still believe in buy-and-hold, because the next 6-12 months will be no different from the last, and if anything the challenges will get harder to overcome for those who only trade regional cash market sessions. Futures contracts are trading the global momentum swings and sentiment reactions and setting fair value ahead of the bell.

Waiting for the cash market bell to ring will be like standing on the gallows waiting for something to happen for those who do not have a plan. Average daily trading ranges will hold around 3% on most global asset classes, but as seen in 2011, the same 3% daily moves will unlikely lead to 12-month valuation changes. This is a trader’s market, which has evolved with new rules for the new-normal. Get used to it, because things will not be changing anytime soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.