Trading may seem easy (or should I say easier) when central banks lead and markets follow.. On the other hand, trading can turn more complicated when opinions diverge, pitting a battle between markets and central banks.
The latter suggests a risk of turbulent markets in the period ahead as I explain in the following:
In what I like to call “the good old days,” traders would challenge and go on attack when they sensed a lack of central bank resolve.
Perhaps the most newsworthy of these events occurred when George Soros broke the back of the Bank of England.
Black Wednesday, which occurred on September 16, 1992, is now known as the day when speculators “broke the pound.” This euphemism is used to describe the moment in time where market forces coalesced to force the British government to exit the European Exchange Rate Mechanism ERM by removing its currency from that agreement.
Markets have since evolved to where it became more profitable to follow the lead of central banks rather than to challenge them.
This was a good strategy until recently where central banks, such as the Fed, sent a clear message that terminal interest rates would rise above 5% and stay there for an extended period of time (I.e. higher for longer, implying no rate cuts in 2023). Markets, on the other hand, priced in a lower terminal rate and the risk of a pivot to rate cuts early in 2024.
Markets are currently experiencing a reality check and coming more into line with the Fed’s message, albeit reluctantly.
So, where do we go from here?
I don’t think even the Fed knows what will be the peak in rates that puts a serious dent in employment and sufficiently slows the economy to drive inflation lower.
This suggests an uncertain period ahead and ad Larry Summers indicates, we are in for turbulent times.
Summers Sees Turbulence Ahead With Market Complacent on Inflation
So, how can you take advantage of “turbulent times?”
For now, take it one day at a time until the path of monetary policy becomes clear and expectations coalesce, hold on to your seat belts, stay nimble in a market that will likely stay data dependent and continue to overreact to headline news.
In the week ahead, ECB Interest Rate Decision on Thursday and US Average Hourly Earnings MoM, Non Farm Employment and Unemployment Rate will definitely stir some waves of hysteria and panic amid trading community .
As for me, I can only suggest the best way I know how to navigate any market condition and that is by getting access to The Amazing Trader and follow the ladders. Stay tuned for a follow up email on how to keep it simple.
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