The changing soul of a city

It's close to midnight. I really shouldn't be writing something at this hour. Yet, despite this, words seem intent on leaving my brain via my fingers, tapping away on this keyboard into a screen, music in the background, supposedly to inspire, but more likely to distract. Looking from my window I see the lights from the City of London and other parts of the town reverberating against a clear sky, the crispness of the breeze whispering that summer is about to pass. It's times like this, that I think I am very lucky to live in London, a metropolis whose soul seems to change repeatedly throughout everyday. Rewind to earlier today and the drabness of grey clouded London, specks of rain cavorted with one another in a journey to earth and hapless pedestrians without umbrellas. As for tomorrow, the sun, I hear is likely to shine, bringing out the masses to lounge in parks.

The changing soul of a city, is like the changing soul of the markets, that overarching stage, on which investors play act. During sunnier times, the market becomes a magnet for good news, whilst bad news is taken in its stride, unable to shatter markets. Seeking yield is the game. At times bad news even becomes good news, as remarked by Mohamed El-Erian in his recent article for Business Insider, discussing the recent positive reaction of markets to poor data out the Eurozone. The rationale was that poor data would spur the ECB to act more dovishly, thereby supporting risky assets. Contrast that to cloudier times, when the market becomes mesmerised by bad news, anything to aid the washing out of market positioning. The game shifts to the preservation of capital. Indeed, we have discussed this in our recent piece Fruit carry filtered, where we suggested ways of systematically identifying risk sentiment.

However, the themes in markets can be a whole multitude of things, not purely related to risk sentiment. Are flows the main driver? Or is it inflation? Are we focusing more on employment data? The list of course is endless. The whole idea of shifting themes is important to bear in mind when trading markets. It is not simply have the right view which matters, it is having the right view about the right theme. Having the right view about the wrong them, can perversely end up costing money. Like the soul of a city, the soul of markets is forever changing.

My book Trading Thalesians also has some colour on understanding market themes and risk (mixed in with a bit of ancient history).