10Y dollar euro europe fed fomc FX le pen populism Trump volatility yellen

The Week That Was: “The Hardest Thing To Do Is Justify Hedging”

Well, it’s been one hell of a week.

We started on a sugar high thanks to last week’s impromptu “phenomenal” tax plan “announcement” and the reflation narrative got another boost thanks to an “unexpectedly” hawkish Yellen on Capitol Hill and a CPI number that blew the roof off.

It also helped that Trump didn’t physically assault Japanese PM Shinzo Abe when the two met last Friday.

But all was not quiet on the “Western” front. The ouster of National Security Advisor Michael Flynn and allegations of Russian collusion hung over the new administration like smog over Beijing. A truly epic meltdown of a presser from Trump on Thursday served as a stark reminder to markets that the US is still facing a looming political crisis or indeed, an outright collapse of government.

Neither was all quiet on the “National Front.” Marine Le Pen’s promise to take France out of the EMU transformed the OAT-bund spread into the market’s preferred risk monitor and on Friday, news that the Front National leader could end up in a head-to-head in the May 7 runoff fueled risk-off sentiment overseas.

Here with a rundown of the week that was is BofAML and Bloomberg’s Richard Breslow.

Via BofAML

The week was a story of two halves for the USD. A good meeting between Presidents Trump and Abe, strong US data, including higher than expected inflation, and a somewhat hawkish tone by Yellen in her Congress testimony supported the DXY early in the week. Then, the index went back where it started, for no clear reason. The latter move may reflect fear of more verbal interventions against the strong USD from the Trump administration, disappointment why the USD did not strengthen even more early in the week, or simply few large flows (from corporates or central banks) that triggered broader USD selling. Risk assets continued to do well in the meantime, with US equities reaching new highs and EM FX appreciating further.

In Europe, markets are getting increasingly concerned about the French elections. French sovereign CDS spreads and yields spreads from Germany have reached their highest levels since the Eurozone crisis. The EUR/CHF risk reversal is approaching the level of the Brexit referendum. Although the polls suggest a very slim chance for Le Pen in the second round, investors are concerned following surprises in the UK referendum and the US elections last year and do not want to take a chance. Even if Le Pen loses in the second round, a better than expected result of PVV in the Netherlands on March 15, or a better than expected result for Le Pen in the first round could trigger market volatility.

We are waiting for the details of the US fiscal plans to see a more sustained USD rally. One of President Trump’s tweets this week suggested again that a tax reform plan was around the corner. We expect details about tax reform and other fiscal policies during President Trump’s address to the US Congress on February 28. We also note that the Fed is not assuming a fiscal stimulus at this point, which could in turn lead to faster tightening than what the Dot Plot includes now. We remain bullish on the USD. We expect US fiscal stimulus in H1. We are short EUR/USD in the short-term, expecting markets to get more concerned about the French elections. Our favorite USD long trade in the medium term remains against the JPY, as the BoJ’s yield targeting policy framework makes JPY the most sensitive G10 currency to rate differentials

Via Bloomberg’s Richard Breslow

In a week that saw Valentine’s Day and strong economic data there was little love for traders out there trying to make sense of the news. The intuitive trades worked for a passing moment, and then they didn’t.
  • Chair Janet Yellen was taken as hawkish. CPI was a clear beat. If you bought dollars on that you’re down money. If you hit the bid on some 2-year Treasuries as the headlines flashed, ditto. The 10-year U.S. Treasury yield printed the week’s low yield Friday, having approached year-highs earlier. Not what you would have been positioned for if you’d received the week’s news in advance
  • Took the global reflation trade to heart? Not only did the Bloomberg commodity index make a new low on the week, but had the effrontery to leave a gap lower on the open. Just a tough, tough week to make a dime
  • Even equities can’t catch a break. The S&P 500 closed at all-time highs every day this week. An amazing performance. In pre-market trading, with futures having given back a small portion of the week’s gains, let alone of the year’s gains, investor’s are allegedly stepping away, not so sure, becoming less enamored. There’s good reason to wonder at the sustainability of this surge, but let it do something wrong first
  • The hardest thing to do in these markets is to justify the expense of maintaining hedges for your portfolio. A sad reality in a world that remains strewn with dangerous uncertainties. Although, after U.S. President Donald Trump’s press conference, you might want to reconsider the benefits of being a prudent investor
  • Holiday in the U.S. on Monday and the festivities may distract attention from the U.K. Parliamentary debate on whether or not to invite Trump to address the houses of Parliament. At the end of the day, it’s an exercise to blow off steam with no practical consequences.
  • U.K. lawmakers will also get to debate the process of withdrawing from the European Union before BOE’s Mark Carney makes an appearance at a Treasury committee Tuesday to discuss February’s inflation report.
  • EU finance ministers will be debating the next steps of Greece’s bailout program. They know what should be done and they need to just do the right thing. Don’t hold your breath.
  • On Tuesday we’ll get euro-area PMI data. Will the momentum continue? They could be market movers. But be quick.
  • The Aussie RBA minutes will be a non-event, having been superseded by the SMP. Of much greater import will be two speeches by Governor Lowe. Especially with the currency back at heady levels.
  • I can’t wait to see the minutes from February’s FOMC on Wednesday. The post-meeting statement was dovish. Nothing about March. Let’s see what they actually said. Remember, these aren’t transcripts.
  • On Thursday the Democratic National Committee begins meetings to elect a new chairman and other senior posts. Expect it to be contentious. With the mid- term elections only 20 months away, this takes on added and unusual importance.



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