By David Gaffen
We may be seeing some sort of return to calm, at least on some levels. General Electric’s results have futures moving higher – the stock is up 3 percent in premarket action – and there’s a general sense that some of the selling has exhausted itself, at least for the time being.
After several days of rapidly careening lower, the market seemed to hit its washout moment late Wednesday, when a torrent of selling pushed the 10-year Treasury to 1.86 percent and more than 4 million S&P e-mini futures contracts changed hands.
Reuters’ Rodrigo Campos and Dan Bases point out a number of factors in a story late Thursday that suggest the selling may have reached its worst levels, and right now, several days in, it’s that moment in the Star Trek episode when the crew, in mortal danger, takes 5 minutes to put together an actual plan rather than just reacting to mayhem.
Vincent Reinhart of Morgan Stanley does a bit of a step-back in a note today pointing out that the firm’s internal monitor of when the Fed will start raising rates dipped to 12.4 months after rising as high as 12.9 months – right around the time when the fed funds futures started to price out a rate hike for all of 2015 and move it into 2016 (it has since come back to around October).
Fear can do that, and Reinhart points out rightly that the Fed doesn’t have “much tolerance for adverse shocks” – judging by comments from Jim Bullard and John Williams over the last few days where they started to float the idea of a fourth round of quantitative easing (odds on that remain pretty darn low).
But it’s important to keep in mind what volatility and a market that has a lot of similar bets can do to the overall framework.
The dollar value of long dollar bets reached more than $40 billion last week, per CFTC data. We’ll get another look at that later today to see what’s been flushed out of those bets.
There has been a big consensus on higher yields, and that certainly was given lie to after this week’s mess of a market, so much so that mortgage funds had to deal with prepayment issues and do some buying too.
Many funds were out there expecting stocks to keep rallying, and this is one of those weeks that keeps them honest.
Getting back to GE, the big conglomerate was, along with blue-chips Exxon, Boeing and a few others, a favored short position among hedge funds and has actually been partially responsible for any gains that long-short funds managed to put together in 2014 (the stock lost 15 percent on the year through Monday, so it was a pretty successful position for hedge funds).
With the turmoil, GE shares have lost 9.4 percent since mid-August, but they’ve rebounded in the last few days – modestly, about a 1 percent gain – but enough to suggest that hedge funds were at least harvesting some of their gains through the shorting of that stock in order to hang onto their bonuses.
From here, it will be interesting to see if GE can keep up this mini-run of momentum as stocks have been revalued by the market’s losses.
