Why are markets out of synch?

For speculative traders, the last few weeks have offered wonderful trading opportunities across all markets, and provided you have no directional bias, the opportunities are there in abundance. More conservative or cautious traders will find these markets immensely challenging, as we are currently experiencing some extreme volatility coupled with divergent markets, a breakdown of correlations, and a lack of trends, a powerful and explosive mix. Indeed it could be argued that the markets are looking for a lead, and failing to find anything concrete on which to hang their hat.

Divergence was an issue I mentioned yesterday, and here it was in the currency majors, with the commodity dollar pairs generally remaining bearish or very bearish, whilst in contrast,  the British pound was in an extended consolidation phase, with the euro finding some bullish momentum. Gold and silver too were also exhibiting a degree of divergence, with the recent sharp rise, not reflected in the industrial metal.

This divergence has continued overnight, with the Nikkei trading lower, but with the UK markets picking up the bullish tone from the close on Wall street following an exceptionally volatile trading session which saw the principle indices whipsaw higher and lower, before finally closing higher at the close. And here again with the relationships to the Japanese yen, once more we are seeing divergence and a breakdown in the reliable gauge of risk and reward for this currency.

Natural gas too is exhibiting its own form of divergence and with the snow storms continuing to sweep across the US, the commodity remains heavily bearish and now looking to move lower still. And oil continues to trade in a world of its own!

The dollar meanwhile remains becalmed and listless, trading in a narrow range as all this extreme volatility rages around it, with relationships breaking down, and correlations no longer holding firm. So what are we to make of all this at present?

Part of the reason, if not a major reason, is the cyclical nature of markets, and the divergence globally that financial markets are now facing. After all, the divergence between the US economy and the European, could not be more stark, with one moving out of recession and into an early expansion phase, whilst the other moves ever deeper into recession. For the Far Eastern markets and Australasia, commodities dominate in every sense, and with China slowing, and with Australia lowering interest rates to weaken its currency, here too, market cycles are out of synch with the US. Coupled with the multi speed economies, we have market intervention and management from all the central banks, to a greater or lesser extent, with only a few exceptions.

Finally, if the cyclical effects of economies were not enough, perhaps even the stars may be playing their part in that we are currently in the middle of what is known as a ‘Mercury retrograde time band’ in a full moon week. And to cap it all we have Non Farm Payroll on Friday!

Happy trading 🙂

By Anna Coulling