Look, markets did indeed react yesterday when, in a rather pitiful attempt to act as though he was disbanding his advisory committees on his own volition, Donald Trump threw in the towel with this tweet sent at 1:14 in the afternoon:
I argued on Wednesday that one of the reasons markets seemed to focus so intently on the passage from the Fed minutes about fiscal policy uncertainty was because Trump effectively dealt a death blow to his agenda with his Tuesday afternoon, racist diatribe in New York.
No one is going to support anything he tries to do at this juncture and corporate America definitively gave “Mr. Thumbs Up” a thumbs down, as CEO after CEO defected, with the most embarrassing rebuke coming from the CEO of Campbell Soup, who quite explicitly cited Trump’s comments as the proximate cause of the company’s vote of no confidence in this presidency.
Well in his Thursday missive, former trader Richard Breslow sets out to explain why we haven’t yet seen a more dramatic risk-off move in the wake of Trump’s meltdown.
There are some great points in what you’ll read below, especially the bit about gold.
But the most important takeaway is what Breslow says about the extent to which stocks have effectively begun to try and price in an eventual Trump ouster which would pave the way for a (relatively) sane Mike Pence to advance the very same agenda only minus all the crazy.
Also note that Breslow calls the last seven days of Trump rhetoric an example of “aggressive jingoism” and says that at this point, we may all just be waiting around for a “Pence-ive solution.”
It probably won’t come as a surprise to learn a lot of people are confused about why markets are behaving this way. After all, wasn’t everything a tumble only a week ago? Yet, as I was looking at the screens yesterday before the torrent of bile made traders give up for the day, stocks and emerging market currencies looked like they expected new highs to be imminent. Treasury yields were back in “that range,” the dollar and credit bid.
- So how come the markets don’t react as one Congressman after another felt compelled to issue statements that they disapprove of bigotry and so many CEOs resigned from the President’s policy and strategy advisory forums that they had to be disbanded? Why do some scary things get acted upon, others get ignored but no matter what we still seem to be back to the same place in short order?
- In trying to answer the question, you can’t make the assumption that every asset class is internalizing the news in lockstep fashion. Even if, ultimately, they may be trying to say similar things. Wall Street looks like it’s sanguine. But that would be a poor interpretation. Investors are just trying to handicap how this all might ultimately unfold and prudence, along with optimism, is creating this endemic low volatility
- Why are equities bid? No, it’s not based on cheap valuations or some misguided notion that there’s long-term value to be unlocked. Yes, they love the low rates and know the Fed has their backs. But they’ve managed in an example of salesmanship tour de force to move on from the misguided Trump agenda euphoria meme of late last year to “when he’s gone everything will be well.” And the business friendly aspects of his agenda will be back in play. They can’t avoid the sensible upset caused by aggressive jingoism, to whit last week, but ongoing ineptitude reduces it to a question of timing. They can live with sooner or later as long as they believe they’ll be around to see it
- The dollar is bid, or, more accurately is stabilizing, because it’s already fallen a long way and the numbers just aren’t all that bad. And if we can get beyond shocks, including the debt ceiling embarrassment that freezes the Fed, it remains the base case that U.S. rate hikes will lead the rest of the world, not the other way around. The last thing another central banker wants to do is raise rates and then see a Fed that’s changed its mind
- Bond yields remain under extreme pressure because they aren’t prepared as yet to be complacent about what foreign exchange traders are hoping to fade. That’s what makes both markets so good at what they do. But make no mistake, bond yields are trying their best to show that much below here will require a full-blown crisis. And it won’t have anything to do with economic releases. Besides, staying long fixed income is the best hedge for everything else because long rates will move at a slower pace than other asset prices with higher betas
- Watch gold prices. They are trying to make new highs and are overly resilient which, in fact, does mean something. As the oldest of the financial assets it’s learned that a week is a long time in politics. And the mess usually gets worse before we come to a neat or Pence-ive solution