Just Waiting On The ‘Hammer Blow’ That Cracks The ‘Egg Shell’

Well, here we are, one day on from yet another bombshell from the Trump administration where the reshuffling of the deck chairs on the Titanic is a daily exercise.

Asian markets weren’t generally loving what Trump’s latest staff shakeup seemed to telegraph about America’s increasingly adversarial stance towards the rest of the world. A Politico story about a forthcoming crack down on China in retaliation for IP theft didn’t help (you can just hear Trump now: “they’re stealing our brain secrets!“).

Shares fell pretty much across the board in Asia despite decent econ out of China where things are humming along nicely in the world’s engine of global growth and trade despite tighter monetary policy and an ongoing effort to shift the economy towards a more sustainable long-term model.


In Hong Kong, things would have been materially worse were it not for a late rally that helped shares trim losses:


Mainland shares were off as well, with small-caps down nearly 2%:


While some folks are convinced the Tillerson exit will be digested as easily as Cohn’s ouster by markets, Bloomberg’s Garfield Reynolds isn’t so sure.

“2018 is looking more and more like the year when political risk takes center stage once again after spending much of the previous decade as a sideshow,” he wrote overnight, adding that “Trump’s revolving door administration and his trade rhetoric are only part of the trend — Japan’s land scandal, the U.K.-Russia confrontation and Italy’s messy election also highlight the end to certainty that’s infecting markets.”

One of things we’ve been on highlighting recently is the extent to which markets will likely be unable to absorb political shocks in 2018 with the same alacrity they did last year. The preponderance of 1% moves in either direction for equities over the past two months suggests the regime has shifted. It appears as though Goldilocks is in peril and so goes Goldilocks, so goes the low vol. regime. The less durable the low vol. regime, the more accident prone the market will be, which brings us back to Reynolds who, in the same note cited above, writes that “every ‘short-lived’ hammer blow threatens to be the one that cracks risk appetite like an egg shell.”

Here’s a bit of additional color from Credit Suisse on what all of this means for the dollar (you can pick up on the pattern here – everyone is getting increasingly concerned that there’s only so much everyone else is going to be able to take from Trump):

Last week’s announcement of the US imposing tariffs on steel and aluminum imports was followed by the resignation of US chief economic advisor to the President Gary Cohn and, yesterday, of Secretary of State Rex Tillerson. Both developments have been met with market unease. News reports of Larry Kudlow being the front runner as Cohn’s replacement might, if confirmed, generate some degree of support for the USD in the near-term due to his vocal criticism of the administration’s relaxed stance on the dollar. We would nonetheless be inclined to fade any White House personnel driven rebound in the USD, as the announcement of the executive order blocking the acquisition of US tech firm Qualcomm on national security grounds represents a significant escalation of the US administration’s protectionist stance, one that might further exacerbate the funding outlook for the US’ widening current account deficit. In this regard, the decision to block this deal brings further weight to our BOP-based case for further USD weakness.

Oh well, at least space is safe.



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