Market Thinking

making sense of the narrative

Circular arguments

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FX traders are the ultimate noise traders, using vast leverage and chasing percentage moves that barely touch the real world. Next are the commodity traders, using less, but still meaningful amounts of leverage, then fixed income, again with leverage but less than commodities. Finally come equities, with little or no leverage. There is a mantra beloved of fixed income traders that FI is clever and equities are dumb, because Equities tend not to buy into all the economic excitement the traders try so hard to generate on a constant basis. As noted in the previous post, the obsession with high frequency but poor quality (and often very poorly interpreted) data such as the PMI indices, or the theatre of the non farm payrolls will thankfully be so confused by the virus situation that the usual trading on speculation will be less frantic for a while at least.

Meanwhile, the traders and the economists that feed them also refer to Copper as Dr Copper, the metal with the PhD in economics. It is interesting to see therefore the high correlation between the opinions of the Copper and Gold markets and the Fixed income markets, as revealed in the following chart, a line of Gold versus Copper compared to a line showing TLT, the long bond ETF. Who follows who? Difficult to say over the last five years, but certainly it suggests that the ‘bets’ of macro traders may all be the same direction, indeed the same thing.

Gold over Copper and Long Bonds, who follows who? Or just the same trade?
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