Commodities across the board are selling off, especially oil. Why? The chance of further disruption in the ME seems to be receding, or is at least old news, and it is time some of the speculation about that came out of the market. But to justify sudden falls like this, one has to look for something more fundamental, and that is concern about the global economy. US data has been disappointing for some time and today’s employment data were hardly robust. Further, the end of QE is on investors’ minds and there is genuine tightening in EM and Europe — and China is sounding increasingly hawkish, although whether it actually manages to bring an end to the credit bubble remains to be seen. The point is that various places have entered a real tightening cycle, and those countries that have not — the UK and US — are reckoned to be doing it more slowly, but still inclined to tightening in the coming months, and in particular the end of QE2 is playing on investors’ minds.

As ever, the question is: can this change the trend. The answer is: yes. A global tightening cycle is enough to change a trend.

Let’s think about the two pillars of macro analysis: liquidity and reflexivity.

Liquidity: Global tightening; QE ending.

Reflexivity: The most important reflexive relationship in the past 9 months has been the one kicked off by QE2. QE2 => asset markets rise => real economy improves => asset markets rise etc. But expectations of economic performance, particularly in the US, have got ahead of themselves, which is why the data have been disappointing recently. That may be enough to break the cycle.

In summary, liquidity conditions are worsening at the margin and the supportive reflexive relation could be coming to an end. These facts have been evident for some time in commodity and global equity trends, but a good earnings season has meant they have not been manifest in the S&P 500. A good earnings season means that profits have been beating forecasts; as the season comes to an end, the question becomes which way investors’ expectations for future profits are moving. In other words, the S&P could now focus on the same issues as other global markets. Thus current prices are an opportunity to go short.

One objection to this is that the best market to bet on is usually the one that has been running most strongly. Perhaps I should also be looking for an opportunity to be short copper or something similiar. Also, I wish I had gone long treasuries at their recent bottom — they are rallying now, as I expected, but I have never felt the was a buying opportunity in the futures and have still not got the options I need to make a bet (faffing about with the broker, and anyway the time for them has also passed).

What about my previous opinions? Up until the last few days, the most reasonable explanation for market action was that investors expected high oil prices caused by supply constraints to crimp global demand. But recent action is not consistent with that story — supply worries seem to have fallen out of the oil market in a single day. Perhaps a way to reconcile this is one of my favourite observations: markets don’t care until they do. Until yesterday, markets didn’t care about global tightening and the deteriorating US picture; today, they do.

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