So far, this year has been all about testing the mettle of 2017’s “consensus” trades (long USD and short USTs).
(Chart: BofAML)
Although the dollar and yields were already displaying a tendency to drift lower going into last week’s Trump presser, the narrative took a big hit when the incoming President failed to outline any specific plans regarding fiscal stimulus initiatives. The blockbuster 10Y auction that went off shortly after Trump left the podium was indicative of how the market felt.
Then, on Tuesday, the dollar plunged after the Wall Street Journal published comments from Trump who opined that the greenback was already “too strong.” It didn’t help that he also criticized a GOP border tax plan that many believed was yet another reason to keep the faith in the long USD, no-brainer trade of the year.
So the narrative is being tested and, as former FX trader and Bloomberg contributor Richard Breslow notes, all trends must prove they can stand up to a test.
Via Richard Breslow
Trends go through life cycles. There’s more to them than just a big move that happens because some market theme becomes all the rage. Enduring moves need to do more than cover a good deal of ground. They must endure through re-evaluations and tests of support. Even the best trend often bends. The question becomes, will it break?
- The Trump trends that emerged after the election are getting their first serious test. So it’s well worth watching carefully how this plays out
- Since November, we’ve seen asset prices move with an impulsive ferocity across the board that surprised everyone. Don’t let anyone tell you they saw this coming. So far momentum has disappeared and with the current corrections the moves are being tested, haven’t really bent, and, despite lots of commentary to the contrary, are holding. So far
- Look back at some of the great trends and someone, after the fact, will draw a trend line that held all sorts of pull- backs. And then proclaim that a monkey could’ve traded it and made a fortune
- The most famous one of all, the 10-year U.S. Treasury yield from 1987 to now, is a case in point. The 250 bps rise in 1994 that almost bankrupted a wide swath of Wall Street held perfectly. I guarantee that no one was telling the general partners at Goldman they had nothing to worry about because there’s this line
- But there are little lines that need to hold to make the big lines possible. And these bear watching. Especially since everyone’s year is marked to market at Dec. 31 prices. And in many cases feeling the full brunt of this pullback. Just take a gander at the ever-popular yuan one-year forward outright. Pain is pain, no matter what your best-laid plans
- UST 10-year has resistance at 2.28%. Two tests of 2.30% have not broken through and yields remain above the 55-day moving average. Which, coincidentally (?), is at…2.30%. DXY getting pummeled, yup, and it hurts. The index needs to fall another half percent to have had a false, albeit impressive, breakout. The S&P 500 is less than 1% from all-time highs. Enough said. Gold is either an outlier or a tell. It is breaking higher and should stop right about here to keep its story alive
- The other thing to remember is trends can re-emerge. Failing doesn’t by definition mean reversal. It’s important because your first investor newsletter may depend upon it
