Well, another day, another green close for stocks. The default is always “up” and right now, we’re in “default” mode.
Everyone’s waiting on payrolls, which is amusing because everyone already knows that payrolls will mean absolutely nothing this time around due to hurricane distortions. And speaking of hurricanes…
President Trump: â€œI hate to tell you, Puerto Rico, but youâ€™ve thrown our budget a little our of whackâ€ https://t.co/nDSnQPbfdq
— CNN Politics (@CNNPolitics) October 3, 2017
Yes, Puerto Rico has thrown this whole “budget thing” “out of whack.”
But that’s ok, because one surefire way to fix any budget problem is to cram an ill-conceived tax cut down everyone’s throat, and getting that done will be super-easy, just ask this “simple” chart from Goldman:
But just because this has exactly zero chance of going smoothly doesn’t mean anyone is prepared to aggressively fade the dollar rally just yet. The greenback was little changed on the session – again, traders are waiting for something, they just don’t quite know what.
Generally speaking, stocks are never going to decline again (just one month to go before setting a record for consecutive months of positive total returns) :
The relentless Russell rally took a breather on Tuesday which is probably a good thing considering it’s the most overbought in roughly 486 years:
As a reminder, have a look at the reversal in small-cap underperformance:
And just sticking with the “rotation” charts, here’s a little annotated roadmap on value vs. growth:
Finally, a look back at all of the rotations since September 7 via Goldman:
Suddenly, traders are waking up to the reality of the bond selloff. A new JPM survey shows that for the week through October 2, 44% of clients are holding a short position relative to their benchmark. That, Bloomberg notes, is “the most since 2006 and up from 30% in the prior period.”
Which reminds us: with stocks stretched and bonds selling off, there are real questions as to whether the negative stock-bond return correlation (which underpins the whole notion of why it makes sense to diversify) will hold up under pressure. You better hope it does, because if that correlation flips positive and stays there when things are moving in the “wrong” direction, well then there’s not going to be anywhere to hide…
Oh, and if real rates are rising that will dent gold too, which means there might literally be no “safe” assets (more here).
Manufacturing activity is apparently expanding in every corner of the damn world:
Which makes you hope central banks aren’t really data dependent, because if they are and they’re also willing to look through purportedly “transitory” weakness in inflation, well then it’s high time to normalize and you know what that means for risk assets.
The Nikkei is sitting at a two-year high:
This is of course being helped along by a weakening yen as USDJPY has been largely a one-way ticket off the lows hit on the Friday before Irma and North Korea’s founding day last month:
Remember, there is considerable political risk here. Here’s Goldman:
USDJPY has closely tracked real rates, but may have more idiosyncratic risk in the weeks ahead. Through most of the recent bounce in the USD, the JPY has depreciated like an ‘EM high-yielder’, proving an effective hedge for a core rates selloff. And we continue to think that it makes sense to diversify the mix of funders for any EM long position, and to include JPY in the current environment. However, idiosyncratic risk may return as a result of the snap election called by PM Abe. The political situation remains fluid, but early indications are that the LDP will not sail to an easy victory. In brief, the popular governor of Tokyo, Yuriko Koike, has created a new national party, Kibo no To (Party of Hope), to contend the election. To make things interesting, late last week the largest opposition party, the DP, effectively disbanded and threw its support behind Hope. Combined, Hope and DP poll at around 20-25%, compared to roughly 30% for the LDP. While an Abe/LDP victory still seems the most likely outcome, with gains over the coming weeks, Hope may yet have a fighting chance of making substantial inroads (over the next week focus will be on fielding candidates, with formal campaigning starting around October 10; Koike herself must also decide whether to run as a candidate in the national election, at the end of the current session for the Tokyo assembly on October 5). Neither Koike nor other Hope leaders have expressed detailed views on monetary (or fiscal) policy, but given their change/reset campaign message, we believe a victory would call into question the sustainability of the BOJ’s easy stance, and open the field of candidates for Governor Kuroda’s replacement. So even though some aspects of Hope’s agenda may be pro-growth, the bottom line for FX markets is that USDJPY should tend to be negatively correlated with polling results for Hope, at least until the party’s views on monetary policy become clearer.
Do keep that in mind. It’s a wildcard.