We haven’t reported on the HFT topic during the past weeks. HFT still exists, and is not decreasing the manipulation. Broken markets are continuing, and no, HFT do not provide liquidity, as they are liquidity aggressors (ie they take liquidity). From Nanex;
We have found many more examples of HFT algos running out of control since our recent discovery of algo tests occurring during active regular trading hours. We now know that there are thousands of similar events every trading day: we missed many of these because our filter parameters were set too high. In the example below, you can see how much it affects prices investors receive. HFT proponents would like you to believe the spread of CARB is 5 cents or less (the quiet period between 13:25 and 13:40) And they are right! The spread is narrow.. when there isn’t any trading activity. But once there is a hint of trading activity, the BBO oscillates to such a degree that it has no meaning. It might as well be infinite.
Guest Post by Macro Story.
I want to revisit a few posts and references to the possible breakout of US Treasury futures and its impact on equities. The reason being the last time treasuries broke out and reached all time highs the equity market experienced a sharp and sudden selloff.
There is no guarantee the same thing happens but the data is too hard to ignore and assume the divergence between both asset classes can simply continue.
Below is a chart that compares the SPX, TNX (10 year treasury yield) and AUD/USD (the risk on currency). What I found interesting is that AUD/USD played no role in causing the selloff. In fact AUD/USD lagged by a few days before finally moving lower.
What really got the equity selloff going was when TNX took out prior low yields as shown on the chart. The US debt downgrade and equity head and shoulder’s failure all came after treasury broke out. Why I mention this is to simply look for AUD/USD weakness as a sign of an equity selloff may not be the most accurate gauge.
As we all by now know, it is a market run by central banks. The question is; are they running out of tools, and need to modernize the tool box? From Bloomberg;
Even before the Great Recession, mainstream economics offered few clear-cut policy prescriptions. At the top of an embarrassingly short list were two rules of monetary policy: keep prices stable and politics out of central- bank operations. Now, it may be time to rethink both.
Economists advanced these principles with great confidence until recently — and the confidence seemed justified. Decades of theory and practice taught that inflation was economic poison. It blurs price signals and holds back growth. The idea that you could create jobs by tolerating a bit more inflation had been discredited. It might be true for a while, but the gain wouldn’t stick. Central banks should aim to keep prices stable – - meaning, in practice,inflation of, say, 2 percent a year.
Last week S&P downgraded credit ratings on several European countries. Today, the World Bank downgrades growth prospects of the World. While the economy is falling further, we have the central planners trying to ramp up asset prices. Things are getting rather interesting going forward. From the World Bank.
Developing countries should prepare for further downside risks, as Euro Area debt problems and weakening growth in several big emerging economies are dimming global growth prospects, says the World Bank in the newly-released Global Economic Prospects (GEP) 2012.
The Bank has lowered its growth forecast for 2012 to 5.4 percent for developing countries and 1.4 percent for high-income countries (-0.3 percent for the Euro Area), down from its June estimates of 6.2 and 2.7 percent (1.8 percent for the Euro Area), respectively. Global growth is now projected at 2.5 and 3.1 percent for 2012 and 2013, respectively.
Slower growth is already visible in weakening global trade and commodity prices. Global exports of goods and services expanded an estimated 6.6 percent in 2011 (down from 12.4 percent in 2010), and are projected to rise by only 4.7 percent in 2012. Meanwhile, global prices of energy, metals and minerals, and agricultural products are down 10, 25 and 19 percent respectively since peaks in early 2011. Declining commodity prices have contributed to an easing of headline inflation in most developing countries. Although international food prices eased in recent months, down 14 percent from their peak in February 2011, food security for the poorest, including in the Horn of Africa, remains a central concern.
“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President for Development Economics.
Developing countries should take steps to plan for a global economic meltdown on a par with 2008-09 if the European sovereign debt crisis escalates, the World Bank warned on Wednesday. The FT reports the World Bank is forecasting significantly slower global growth in 2012 than it expected last summer even if the eurozone muddles through its crisis,http://ftalphaville.ft.com/thecut/2012/01/18/838161/world-bank-warns-emerging-nations/
An administrator of MF Global’s UK arm has warned some customers of the failed futures broker might not see all their money returned. Richard Heis, joint special administrator at KPMG, told the FT that his firm had recovered some £594m or 82 per cent of customer funds held in so-called segregated accounts, http://ftalphaville.ft.com/thecut/2012/01/18/838301/warning-on-returns-from-mf-global-uk/
Central banks increased the amount of gold they lent for the first time in a decade in 2011, as they used their bullion reserves to help commercial banks raise US dollars, says the FT. Thomson Reuters GFMS, http://ftalphaville.ft.com/thecut/2012/01/18/838491/central-banks-increase-gold-lending/
Spain’s new government is pressing for Bankia, a group of savings banks listed last year, to seek a merger with another Spanish bank in a deal that would create the country’s largest domestic lender by assets if it materialised, http://ftalphaville.ft.com/thecut/2012/01/18/838561/spain-pushes-for-domestic-bankia-merger/