In the past two years or so, I have often marveled at how differently the U.S. markets react from Asian and European markets when it comes to “bad” news released overnight (Eastern time). I do not yet have formal data or analysis, but I wanted to share some informal, personal observations. During the market recovery last year, a friend of mine suggested that perhaps the higher liquidity in the U.S. markets could explain why the U.S. markets seemed to react so much better to bad news delivered overnight. It is also possible that by the time U.S. markets open, traders have had enough time to absorb and process the news and are less prone to overreact, turning what looks like an excuse to sell into an irresistible buying opportunity.
My latest example of this contrary behavior comes from the Thursday-Friday trading in the U.S. dollar. The U.S. dollar surged in the immediate aftermath of the Federal Reserve’s surprise hike in the discount rate at 4:30pm on Thursday. The selling lasted about three hours. For the rest of trading during the Asian and European sessions, the dollar stayed within a relatively tight range. But soon after the U.S. trading session began at 7:00am (Eastern time), the U.S. dollar showed its first real signs of weakening. By 11:00am, the sell-off began in earnest, and by the close of trading, the U.S. dollar had essentially lost all of its post-Fed gains. The 30-minute chart below summarizes the action using the euro vs the U.S. dollar (EUR/USD).
(*Chart from dailyfx.com power charts)
This action raises two questions for me:
- What new information did U.S. traders have that was not available to traders during the Asian and European sessions?
- Why don’t traders anticipate the contrary nature of the American trading session and either temper their initial reaction to the news or discount the anticipated American reaction by the start of the American trading day?
The daily chart of the U.S. dollar index shows that the dollar broke out to fresh 8-month highs but faded exactly at the highs from June.
*Chart created using TeleChart:
On a somewhat related note, Mark Hulbert provides an interesting interpretation of the stock market’s reactions to moves by the Federal Reserve in “Silver lining for stock futures’ post-Fed fall“:
“…the surprise discount-rate hike means that the Federal Reserve is convinced that the economy is even stronger than many had previously thought — strong enough, in fact, to tolerate an accelerated exit strategy. You’d have thought that investors would celebrate and drive stock futures higher. The reason they didn’t: The stock market’s level had already taken into account the economic strength that is only now being tacitly recognized by the Fed.
Note carefully that it therefore would have meant something entirely different if stock futures had instead risen strongly Thursday night in the wake of the discount-rate hike. Such a reaction would have signaled that investors remain gravely worried about the health of the economy, eager to grasp onto any straw in the wind that indicates the economy may be stronger than thought.”
Hulbert references research on the stock market’s reaction to unemployment data to bolster his point.
The U.S. stock market did open down, but it managed to close up with the narrowest of gains (I had anticipated a down close as an early start to what I expect will be some post options expiration selling. Note that Trader Mike anticipated that buyers would step in if the market showed weakness at the open.). So, it is far from clear exactly what the stock market really “thinks” about the Federal Reserve’s surprise move. The reaction will be a process and not an event. We can be sure that markets will be much more on edge ahead of the next several meetings of the Federal Reserve.
Be careful out there!
Full disclosure: short EUR/USD