Boy I gotta tell you, the bar is pretty f*cking low these days.
Going into last week’s Trump/Abe meeting, there were concerns that the new President might not have a very nuanced grasp of monetary policy.
Now make no mistake – I’m no defender of this ongoing global experiment in Keynesian insanity. That said, there’s a whole lot going on in Japan, where the proverbial envelope has been pushed about as far as it can be pushed when it comes to easing.
The BoJ has now resorted to defending one maturity (the 10Y) in an effort dubbed “yield curve control” and to be honest, it’s doomed to fail as global inflation expectations rise. But that’s not the point. The point is that between YCC, ETF purchases, JGB purchases, and jawboning, the BoJ has gone all-in on this and with the market primed to flee to safe havens at the first sign that the reflation narrative is kaput, anyone in a position to move USDJPY (like say Donald Trump) has to be very cautious when it comes to doing anything to upset what is a decidedly delicate balance. Well, Trump isn’t good at caution and no one ever accused him of being delicate.
So it was a relief that the Trump/Abe pow-wow didn’t go horribly awry. And by “horribly awry”, I mean Trump didn’t accuse Abe of manipulating the yen with loose monetary policy. Apparently, some one told Trump to back off the rhetoric or risk plunging markets into chaos as soon as FX markets opened.
Coming full circle, that’s what I mean when I say “the bar has been set pretty f*cking low.” We didn’t have a catastrophe. That’s what counts as “winning” under Trump.
Here to elaborate further is former FX trader and Bloomberg contributor Mark Cudmore.
Markets are trading positively and the drivers suggest that further gains can be made in the short-term.
- The media may refer to the Trump-Abe bromance, but the fact of the matter is that this week’s strong start to markets isn’t driven by any particular positive catalyst. The two leaders delivered no surprises
- Instead, this rally is largely based on the absence of new negative catalysts. The fact that Trump met another major world leader and didn’t create an international incident is now a notable event
- Following on from last week’s apparent rapprochement with Xi Jinping, investors are suddenly attributing a lower probability to the U.S. disrupting global trade and following an isolationist path. This has been enough to bring cash in from the sidelines as investors chase higher prices in equities and emerging markets
- And the ensuing technical breaks across assets mean that even the cynics won’t be tempted to fight these moves, yet
- Yellen’s testimony on Capitol Hill is another risk event on the horizon but, with 28% probability of a March hike priced despite still subdued inflation, it’s very likely to prompt a further boost to asset prices
- The theme of this week could be a lowering of the Trump risk-premium. It may very well flare up again in the future but all long-term sustainable trends go through healthy consolidation periods. No sense in fighting the positive sentiment this week
These are your world leaders. How safe do you feel?…