3 Trading Patterns Dominate Year-End Markets

Global trading in the final quarter of 2010 is being dominated by equity and yield sentiment on a daily basis.
By Marco Hague ,

(TheLFB-Forex.com) -- The last quarter of 2010 will go down as a three month trading period that has global traded markets dominated by equity and yield sentiment on a daily basis. October, November, and December broke the previous twelve month pattern of equity direction being determined by the U.S. Non-farm Payroll report, as financial institutions and speculative investors absorbed a raft of Oct-Dec changes to the trading arena.

The implementation of the Dodd-Frank Financial Reform bill (Fin-Reg) left investment banks with no choice but to break up their proprietary trading desks, repatriate overseas accounts and restructure trading schedules, something that heavily impacted daily activity and order flows in October. Moves by the U.S. administration to challenge Wall Street daily activity were implemented and initiated, against a back-drop of massive investor redemptions that hit record numbers since the May flash-crash.

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The month of October moved equities in the first week and then consolidated hard for the next three weeks.

Following closely in the footsteps of Fin-Reg was confirmation of the

Federal Reserve

' Quantitative Easing program (QE2) on November 3rd, something that had been widely anticipated as a historic move from a central bank moving into unchartered territory, with an untested fiscal policy. The rebalancing of risk valuations that were back-stopped to the greater degree by the Federal Reserve allowed Primary Dealers to act with impunity in choosing where the free money was to be put to best use; unique times indeed.

The month of November moved equities in the first week and then consolidated hard for the next three weeks.

Following on from Fin-Reg and QE2 was the collapse in Treasury and bond market values, with December revealing a 9% drop in 10 year note values in response to QE2. The moves in the bond market increased yields and pushed inter-bank and commercial lending cost relentlessly higher, and created a substantial increase in mortgage rates and credit default swap costs. The reaction to the

Fed

's QE2 policy has been seen in low-participation price ramps that are violently reversed as each regional equity market session opens and closes.

The month of December moved equities in the first week and has consolidated in a tight range on the

S&P 500

since then.

The inverse Usd/Equity correlation is running at 95% on a 12-month basis, and is also holding a high percentage on a near-term intra-day basis. With the last three months of trade all moving in the first week and then consolidating hard, the forex arena has been riding the momentum of regional equity trade; up, down, and sideways.

Currency consolidation will continue until S&P 500 futures trade breaks support at 1230 or breaks resistance at 1250. Trading in-between that 20 point channel will allow forex pairs to hold the 4-hour chart price ranges that have consolidated hard and drawn in Daily chart simple moving average areas not seen for quite a while.

Marco economics are dominating near-term risk valuations, with traded markets absorbing unique plays by central bankers trying to get agreement on currency valuations at a time that global growth seems to be coming by artificially instigated means, rather than a break out of the business cycle trough. The red-flag economic releases will determine currency direction, and a trend will form once economic releases align with speculative trade direction. Until then the knee-jerk reactions to daily sound-bites will continue to impact valuations.

How the unique attempts by central bankers to shape a new financial environment transpires is open to discussion, with no clear picture forming as to the sustainability of quantitative easing programs by the Federal Reserve, liquidity withdrawals by the ECB, inflation concerns at the Bank of England, real growth challenges for the Reserve Bank of Australia, continued stagflation issues at the Bank of Japan, and U.S. impacted Bank of Canada challenges.

Since the scrapping of the Gold Standard and the creation of the Dollar Index nearly 40 years ago there have been five or six Black Swan events in currency markets that have changed the way that valuations are made. October to December 2010 may well go down in the annals of history as the culmination of Sub-Prime, Credit-Crisis, and Sovereign Debt issues that have been in play for the last three years, and the start of a new era of trading patterns and direction.

The instigator of a sustainable move in currency markets may come from year-end trade that balances books and locks in profit and loss numbers, thereby freeing up liquidity that can be put to use building 2011 positions. After three months of sporadic trade followed by heavy consolidation the next big trending move may be much closer than some may think.

Marco Hague is one of the founders and principals of The London Forex Broadsheet (commonly known as TheLFB), a global forex trader portal with headquarters in the U.S. Hague began his career with the Bank of England dealing with foreign exchange control, and he has been trading for the last three decades. He has been involved with institutional risk asset ratio analysis and the implementation and maintenance of institutional trade desks globally.

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