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Financial markets rally on false rumour

Financial Events
By Paul Hodges on 16-Apr-2012

S&P500 Apr12.pngLast week saw yet another example of the damage being caused to financial markets by the computerised high-frequency traders (HFTs).

As the chart shows, the S&P 500 jumped 20 points on Thursday (1.5%), whilst the Dow Jones Industrial average jumped over 200 points. The cause was a rumour that China’s GDP would come in at 9% for Q1.

This, of course, was most unlikely. One of China’s top economic officials, Zhang Xiaoqiang, said on 3 April that Q1 GDP had slowed to “around 8.4%”, and premier Wen had announced a 7.5% target for the year. Anyone following China’s economy would have known these facts.

But the computers don’t follow real issues. Nor do they make human-style judgements. They are simply programmed to follow the crowd. So the more people talked about the rumour (and it was on the Wall Street Journal site by 10.51am), the more the computers rushed to buy.

Of course, next morning, the GDP figure was officially announced as being 8.1%. And so the computers then sold off all day. The market ended on Friday less than 2 points higher than its Thursday opening.

This highlights yet again how markets have become diverted from their real purpose of price discovery, into zero-sum trading games.

The chart shows price changes since the IeC Downturn Monitor launch on 29 April, with ICIS pricing comments:
China (red), down 13%. “Players said demand will continue to be weak throughout April and May”
Benzene NWE (green), down 10%. “Buyers and sellers appeared reluctant to move up amid wider economic uncertainty”
HDPE USA export (purple), down 6%. “Traders said they expected to see prices slide in the next few weeks, if ethylene spot prices continue to fall”
Naphtha Europe (brown dash), down 4%. “Petchems continues to show limited interest in naphtha”
Brent crude oil (blue dash), down 3%
S&P 500 Index (pink dot), no change

Interestingly, the S&P 500 has now followed Brent crude oil in retracing its ‘break-out’ from its previous trading range. It is back at the 1370 level, the key ‘technical level’ highlighted last month.