Chaos

Well I think it’s safe to say that geopolitical risk – which the naive among you thought had dissipated materially last Tuesday evening when the nice orange man in the blond wig successfully read a teleprompter – has firmly reestablished itself as the market boogeyman.

On Monday morning, Americans (including Trump’s own staffers) are still trying to come to terms with the fact that the man who seemed to be getting something of a grip on Tuesday, apparently lost his sh*t completely come Saturday morning when the leader of the free world accused his predecessor of wiretapping Trump tower. Although we all know where he got his “information,” it’s been hilarious to watch incredulous Republicans try and talk their way around the fact that Trump appears to have relied on a Breitbart article that was itself parroting a Right-wing radio host. Now, the FBI is begging the DoJ to call bullsh*t on Trump but it’s kind of hard for the Justice Department to focus on the wiretapping claim because they’re still reeling from Jeff Sessions’ move to recuse himself from the investigation into the Trump campaign’s ties to Russian spies. All the while, Trump still found time to perpetuate his ongoing war of words with Arnold Schwarzenegger. As I said on Saturday, just a typical weekend in America these days.

Meanwhile, the North Koreans fired another missile on Sunday evening. You can’t help but wonder if that situation could spiral quickly out of control given that it essentially pits one man-child (with a penchant for executing top officials with anti-aircraft guns for falling asleep at meetings) against another man-child (with a penchant for waging simultaneous Twitter battles with federal judges, a department store, and the Terminator). Here’s a telling chart from Bloomberg that shows how South Korean defensives have outperformed tourism stocks…

…thanks largely to our friend in Pyongyang…

In France, the political environment is so fraught that it’s nearly impossible to keep tabs on, but today’s big news is former PM Alain Juppe (who was defeated in the Republican party primary) essentially saying “yeah, f*ck this.” Here’s Bloomberg:

Juppe’s party is trying to salvage its presidential campaign with candidate, Francois Fillon, facing criminal charges for allegedly embezzling public funds. As recently as two months ago, 63-year-old Fillon, another former premier, was the front-runner in France’s most important election in decades. Now he’s facing mounting calls to withdraw.

Juppe’s decision leaves Fillon in place, for now at least, as Republican chieftains prepare to meet this evening in Paris to decide on a plan to take on the far-right candidate Marine Le Pen and independent contender Emmanuel Macron.

“Never under the Fifth Republic has there been an election under such confused conditions,” Juppe said. “As for us — what a mess.”

Yes. “What a mess,” Juppe. I’ve said it once, and I’ll say it again: “thanks populism.”

Following Juppe’s announcement the CAC 40 dipped, falling 0.5% while OAT futures slid to session lows as the OAT-bund spread hit a session wide of +5bps at 64bps. “Markets unwind Friday’s Juppe-motivated risk-on, with Bund futures rallying, core curves bull flattening and peripherals dropping with French bonds, as Juppe rules himself out as a replacement for struggling Republican party candidate Fillon,” Bloomberg wrote, around an hour ago, adding that “local press reported over the weekend Juppe would decline to replace Fillon, prompting early risk-off moves.”

Notably, an Odoxa poll on Friday had shown if Juppe were to enter the race to replace Fillon, a 2nd round run-off between Macron vs Juppe might be seen, removing Le Pen. No such luck – unfortunately.

The dollar (and really the entire reflation trade) unwound further on Monday.

It kind of feels like the market had already moved on to thinking about the prospects for future rate hikes prior to Friday’s hawkish Yellen speech. The March hike was “old news” by the time the vaunted Chair stepped up to the plate in Chicago.

Needless to say, the yen caught a safe haven bid thanks to North Korea’s (small) saber rattling. “Even as markets see three rate hikes as a due course, 10- year Treasury yield is below 2.6%, suggesting little scope for a surge,” said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management. “USD/JPY needs an entirely different reason to climb higher and it looks more and more like the pair has peaked out at the high 118 levels.” Here’s some further color from Bloomberg:

• The yen advanced on haven demand following reports that North Korea fired four ballistic missiles into nearby waters. It held on to gains, outperforming all Group-of-10 peers, also as investors pared short positions after the dollar failed to strengthen past 115.00 per yen last week. Still, the dollar-yen pair found some support above 113.50 amid leveraged and interbank demand
• The latest weakness in the greenback has raised concerns for investors with long holdings in the U.S. currency, eroding conviction in the trade, according to traders across Europe. While an interest-rate increase by the Federal Reserve is largely priced in by the markets, focus has now shifted to whether the central bank’s dot plot on future rates will be more aggressive than current estimates

“The Dollar Index swung between gains and losses as investors looked to lock in profits, with Friday’s ‘buy the rumor, sell the fact price action continuing to weigh on bullish sentiment,” Bloomberg adds. Gee, does that sound familiar? It should. Here’s what I said on Friday immediately following Yellen’s speech:

Bloomberg calls this price action “markets seeking equilibrium.”

Whatever. I call it “fade the f*cking news.”

And here’s SocGen’s overnight take:

Fed Chair Janet Yellen endorsed a further rise in rates as long as inflation and employment data meet the Fed’s expectations. With payroll data due Friday, a decent showing from those figures probably represent the final confirmation for a move next week. The markets are locked, loaded and ready – a move is priced in, near-unanimously expected by forecasts, who on balance now also agree with the Fed’s projection of three moves this year. But with last week’s CFTC data showing record shorts in 10-year note and 3-month Eurodollar futures contracts, the market is also heavily positioned for a move. Hence, with North Korea lobbing missiles into the Sea of Japan this morning, we have a slightly risk-averse start to the week, with 10year Note yields back under 2.5%, the Nikkei weaker and the Yen strongest of the major currencies (though only 0.2% higher against the dollar). Markets may be in a standoff for the next few days.

Oh, I almost forgot – Deutsche Bank is still going under, in case you thought that situation had improved.

All of this is making China look like a veritable bastion of stability (minus the myriad land mines embedded in the country’s labyrinthine shadow banking system) as leaders gather for the annual National People’s Congress in Beijing, where Premier Li Keqiang reiterated a commitment to growth in a speech Monday while warning on the risks associated with reining in speculative excess and transitioning China’s vast economy to a consumption and services-led model. He also went out of his way to mention how f*cking crazy the rest of the world is going. “Li warned of profound changes in the international political and economic landscape with rising protectionism and deglobalization,” Bloomberg writes.

Here’s a wrap of Asian and European markets:

Topix down 0.2% to 1,554.90
Hang Seng Index up 0.2% to 23,596.28
Shanghai Composite up 0.5% to 3,233.87
Sensex up 0.8% to 29,062.68
Australia S&P/ASX 200 up 0.3% to 5,746.51
Kospi up 0.1% to 2,081.36
FTSE 7350.09 -24.17 -0.33%
DAX 11981.16 -46.20 -0.38%
CAC 4974.69 -20.44 -0.41%
IBEX 35 9818.30 19.80 0.20%

Here’s the econ docket for the US:

• 10am: Factory Orders, est. 1.0%, prior 1.3%
• 10am: Factory Orders Ex Trans, prior 2.1%
• 10am: Durable Goods Orders, est. 1.0%, prior 1.8%
• 10am: Durables Ex Transportation, est. 0.1%, prior -0.2%
• 10am: Cap Goods Orders Nondef Ex Air, prior -0.4%
• 10am: Cap Goods Ship Nondef Ex Air, prior -0.6%

Futs are lower, oil’s down.

Happy trading.