Ok, So What Now?

Well, one day on from Trump’s deal with Democrats to rush aid to victims of Hurricane Harvey and avoid any 11th hour brinksmanship ahead of a technical U.S. default, markets were nervous.

Although stocks managed to tread water…

…bonds and the dollar exhibited palpable angst as uncertainty grows about the future of the Fed and as traders tried to decipher what the President’s overture to Schumer and Pelosi means going forward.

The whole thing has a “ok, what now?” type of feel to it.

This was a disaster of a day for the reflation trade. 10Y yields hit 2.032% at one point, the lowest since November 10 (see inset below), while the dollar languished:

Between jitters about Hurricane Irma, a sense that another ICBM launch is just around the corner in North Korea, indeterminacy about the future of the Fed exacerbated by last night’s news that Trump is no longer considering Gary Cohn, and this morning’s econ which gave markets the first read on what we can expect in terms of the near-term drag from natural disasters, whatever “hope” yesterday’s debt ceiling deal managed to instill is fading.

As we suggested would happen on Wednesday given the timing of the December Fed meeting in relation to the new fiscal disaster date, markets are pricing out another hike in 2017.

“Odds of a December hike tumbled for second consecutive session, down to 20% from 25% at Wednesday’s close,” Bloomberg wrote earlier, adding that “factors influencing reduced odds of a hike include:”

• 3-month extension of U.S. debt ceiling to Dec. 8, a week ahead of FOMC meeting that month;
• advance of Hurricane Irma with a further two hurricanes, Jose and Katia, following;
• lingering North Korea tension;

All of that “points to participants throwing in the towel for the Fed to hike at the December meeting, which contributed to a short squeeze across Treasuries and eurodollars.”

Financials were of course under pressure:

Gold climbed to a 12-month high:

The euro spiked as Draghi only paid lip service to recent strength in the single currency. The upgrade to the GDP outlook was a reason to both stay long and a reason to be bullish European equities, which held onto gains despite the surging currency.

All told, he came across as dovish as he could. After all, the reality here is that asset purchases have to be tapered sooner or later – “options” for “tweaking” the parameters or no. Here’s EURUSD:

“Draghi didn’t try very hard to talk to euro down — or at least that’s how the market saw it — and was confident the broad-based recovery will push inflation higher [while] the ECB wants to normalize policy without telegraphing it too clearly so that the economy has room to recover further,” Bloomberg’s Anchalee Worrachate wrote this afternoon, describing Super Mario’s effort to thread the proverbial needle.

If you zoom in, you can see the EuroStoxx and the DAX ebb and flow with EURUSD, but the key here is that thanks to the largely successful needle-threading, European shares managed a convincingly green close:

USD/CAD fell to a fresh two-year low a day after the BoC hike, as U.S. yields tumbled:

Drake’s excited.

@LJKawa @kevinmuir CAD Rises to Fresh Two-Year High as UST Yields Tumble..

cue Canada's favorite son… pic.twitter.com/wmPAGDTEyZ

— Heisenberg Report (@heisenbergrpt) September 7, 2017

Oh, and in a sign of the times following yesterday’s BoC hike, Canada 5Y yield > U.S. 5Y yield for first time since 2014…

The low rate environment has now “succeeded” in pushing investors all the way down the quality ladder as it’s now “stocks for income” both in the U.S. and across the pond:

But “buyer beware” because even when you account for rates, stocks are expensive relative to history:

(Goldman)

Just one more day of this before the weekend, when we’ll all get to put up the plywood and hide in the basement as Irma turns Florida into Atlantis and Kim turns Tokyo into Dresden…

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