If this is an example of the "liquidity" that the High Frequency Trading crowd is supposed to be supplying to the market, a point which I might add we are constantly lectured upon by those parasites as well as the various exchanges which ADORE the volume that their churning provides to their bottom line, then we are in a heap more trouble than many suspect. There is no liquidity because this entire HFT crowd is all on the same side of the trade at the same moment in time attempting to front run each other and everyone else for that matter. This is why we are witnessing such enormous swings in price, going either direction, with those occuring with increasing frequency.Only a few brave and nimble floor traders can take the other side of those trades.
The catalyst for the volatility was the payrolls number, which exceeded the low expectations that had been factored into the markets earlier in the week (Wait until next month where they will probably come back and revise it downward), further fears of a meltdown in Euro land, news from the ECB about a potential bond buying program and then a press conference from Italian Prime Minister Berlesconi.
The equity markets first greeted the jobs number with euphoria rallying nicely off their lows as shorts covered. That rally then completely ran out of steam as new shorts sold the rally with stale longs using it to get out. The thinking was that the real epicenter of the current global economic woes is in Europe - "Who cares about a jobs number in the US" was the thought. That then took the markets, especially the tech-heavy Nasdaq, down over 2% for the day. It was then about halfway through the session, after the European markets were closed for the week, that news broke from Reuters that the ECB would buy both Italian and Spanish Bonds provided that their respective political leaders could institute necessary structural reforms. That seemed to be a game changer for the day. Out came all the fresh short seller; in came a bunch of bottom picking longs and away went all the losses for the stock market.
The bond markets here in the US then sold off sharply on the news with interest rates jumping after the yield on the Ten Year had fallen as low as 2.43%.
However, after Berlesconi gave his speech and began promising the same load of BS that we were just recently treated to here in the US during the debt ceiling charade, the equity markets began having some doubts about the ECB bond buying program and off came the markets from their gains. As I write this the equities are now higher once again however as shorts are getting very nervous heading into the weekend that they might actually come up with Europe's version of QE1. Make no mistake about it - this is exactly what Europe is planning - their own version of Quantitative Easing.To illustrate the madness, as the markets entered the last hour of trade, once again the sellers showed up and down went the stock markets again. Where are they going to end today? Who knows at this point?
Oddly enough, (although one can see the "logic" of the Euro trade), the Euro rose sharply on the news with the short Euro trade reversing sharply as risk trades were piled back on as risk aversion trades were taken off. If one looks at what happened to the Dollar during QE1 and QE2 it is obvious that this foray into monetary madness cut the floor out from beneath the Dollar as the supply of greenbacks was increased exponentially. If the ECB does go ahead with its QE, then the supply of Euros is going to soar and the trade will be to short the Euro. The problem is that this conflicts with the hedge fund risk trade which is to sell the Dollar and run back into the Euro and the commodity currencies. Get ready for more insane instability with the HFT crowd in there just screwing things up even more with their churning. I cannot say with certainty, but I am convinced that we had more than a few hedge funds disappear completely this week. The price swings were wiping out both longs and shorts. Sometimes the smartest place to be is to be on the sidelines watching and waiting while the other guys chew each other to shreds.
That brings us to gold which was all over the place today. It moved back and forth as the news changed, torn between the need to raise cash to meet margin calls, the desire to have a safe haven, the unwillingness of traders to hold "commodities" during a risk off trade, and severe doubt and skepticism towards both monetary authorities and political leaders not only in Europe but over here in the US.
Attempting to therefore make a projection as to where it is headed next in the SHORT TERM is an exercise in futility. All I do know is that it has been relatively solid even when the rest of the equity markets and commodity indices were getting whacked. It's safe haven status remains relatively unmarred even after being buffetted by all these money flow factors.
One of the factors that keeps some pressure on the gold market is the pitiful performance of the silver market. Right now that metal cannot get out of its own way as it is violating chart support levels with the HFT crowd going after it and driving the offers lower and lower. Both it and copper seem to be falling lower in unison. It is tricky to say right now but it might take a stabilization in copper to see silver get its footing here. It has managed to bounce off a support level near the $38.00 - $37.75 level but is acting heavy for the time being. Its 50 day moving average is just below the market near $37.35 so it if it going to prevent a further drop, it will need to remain above this level, preferably getting back over $39 once again.
The mining shares as evidenced by both the HUI and the XAU have remained joined at the hip to the broader markets and bounced when they bounced higher on the ECB news. From a technical chart perspective, they did rebound from a level that was critical for them to hold so I suppose that is a plus but the HUI is currently below its 50 WEEK moving average, which is a level that it must recapture if it is going to have a chance at staging a better rally. Ditto for the XAU which is some 12 points below its 50 WEEK moving average as I write this. It is holding above 190 however which is positive. At some point, the huge imbalance in valuation of these shares compared to gold is going to result in large acquisitions, especially by both the majors and the Chinese.
After the Dollar's huge rally yesterday, it surrendered half of those gains as longs bailed out on news of a possible ECB bond buying program. Where it goes next week completely depends on the kind of news that will greet us come Sunday evening here in the US when the markets reopen for trading in Asia. If we get some sort of confirmation that the ECB will definitely move forward with a bond buying program, look for further volatility in the currency markets as traders will be torn between selling the Dollar to put risk trades back on and buying the Dollar as they sell the Euro in anticipation of a program that will pressure the Euro lower on the crosses.
I will try to get a chart up of gold later on but I would not put too much stock in it until we see what happens over the weekend. I will say this, if the EC
The big thing I am watching right now is these interest rate markets. We might have seen a top in bond prices and a low in interest rates for the time being if the ECB QE program kicks in as all those guys who rushed into Treasuries this week will probably rush back out. Very hard to say however as too much is in flux right now.