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Upside Down: Full Week Ahead Preview

I don't know where you're supposed to turn for "analysis" from here. 

I don’t know where you’re supposed to turn for “analysis” from here.

Previously, if you wanted a shamelessly bullish take on things you could always count on CNBC or on your favorite “name brand” FinTwit pundit. But these days, I imagine “the ratings are tremendous” (to use a Trumpism) for the “Markets In Turmoil” specials and to the extent the FinTwit pundits would normally be inclined to mock the bears with their simplistic earnings growth charts and ebullient pronouncements that “the FANGs are all right”, they seem just as disillusioned with the political backdrop as the rest of us and as for the FANGs, well, they’re not all right anymore.

On the flip side, you used to know where to turn for bearish confirmation bias, but as it turns out, that crowd has put themselves on the wrong side of political history and so, they find themselves grappling with something of a paradox: they want the market to crash so a decade of doomsaying isn’t further discredited, but at the same time, they want to see Trump triumph over the “deep state” and it’s hard to reconcile “triumph” with markets that are collapsing due to this administration’s policy blunders. Additionally, that same doomsday crowd has spent nine years (give or take) searching far and wide for an egregious bubble comprised of “assets” that are undoubtedly going to zero and when one finally came along (cryptocurrencies), they’re pigeonholed into being bullish because Bitcoin is anti-establishment.


So I guess now the tables are turned – you go to the permabears for a more hopeful take and you turn to the permabulls for bearish confirmation bias. Just one more thing Trump has turned upside down.

Speaking of Trump, Sunday night they’ll be a porn star detailing (on national television) how she fucked him. And yes, this is real, this is real life. It’s possible she’ll be condemning herself to a lifetime of legal hell in the service (?) of regaling America with tales of David Dennison’s dick.

That won’t help the President’s demeanor and as we learned earlier this month when the media got wind of the backstory behind the steel and aluminum tariffs, Trump making snap decisions about the future of global trade and commerce based on whether he’s in a good mood is something that’s not only possible, but has in fact already happened at least once over the past four weeks.

Additionally, it’s worth noting that the most absurd thing about the President’s Sunday morning lawyer tweets was not the fact that they were lies nor was the silliest part the fact that they were clearly designed to pre-explain what would happen just hours later. Rather, the craziest part about the tweets was the tweets themselves:

It’s a holiday-shortened week in the U.S – Friday is supposed to be a “Good” one. Of course that’s assuming we make it through the first four days of the week without seeing our books tabula rasa’d by another acute escalation in the burgeoning trade conflict which is brought to you by Trump’s “very good brain” with an assist from Peter Navarro and Wilbur Ross’s animate remains.

As noted earlier in “Just One Question: Do You Have ‘A Coherent Explanation For Precisely What Is Going On’?“, there’s a Treasury supply deluge on deck and depending on how that’s digested, it’s at least possible that we could see the return of the bond selloff, which has abated of late thanks in no small part to the fact that most recent bout of risk-off sentiment was tied not to inflation fears but rather to unadulterated worries about the future of global growth in a trade war scenario and the possibility of a constitutional crisis in the U.S. (an eventuality which is becoming more real literally by the week). As usual, we would encourage you to check out Brian Chappatta’s week ahead bond market preview for the details, but here’s the schedule:

  • March 26: $51 billion of three-month bills; $45 billion of six-month bills; $30 billion of two-year notes
  • March 27: $24 billion of 52-week bills; $35 billion of five-year notes; four-week bill auction which will likely remain steady at $65 billion
  • March 28: $15 billion of two-year floating-rate notes; $29 billion of seven-year notes

LIBOR’s abrupt return to relevance will be in focus. You can see the “just one question” post linked above for our short take on that, but we did want to highlight a couple of passages from Barclays and Deutsche Bank that should serve to kind of crystallize what’s turned into a rather murky debate. Here’s Barclays:

Rising USD funding costs have various implications for investment flows, FX spot and xccy basis, as well as USD-pegged currencies. A rise in short-term USD interbank funding costs has accelerated since the beginning of the year on upward revisions in Fed hike pricing and a widening L-OIS (Figure 3). While the Fed hikes will continue to put upward pressures on Libor, we expect L-OIS, which appeared to be driven indirectly by bill supply, to revert to 30-35bp in Q2. Higher USD funding costs deteriorates the carry of FX-hedged USD bond portfolios for foreign investors especially compared with EGBs where the curve is steeper. For example, Japanese investors are shifting its foreign bond investment from US into Europe since late 2017 because of FX-hedged EGB yields exceeding UST for the first time since 2004-08.


And from Deutsche:

One of the major market themes thus far in 2018 has been consistent widening of the LIBOR/OIS basis. This widening has failed to conform to the template for market stress established during the financial crisis, when uncertainty as to bank viability led markets to be concerned with return of their capital, rather than simply the return on their capital. In the current market, however, wider FRA/OIS has not been associated with any acute concerns about bank solvency. We have argued that the fundamental difference between the current market environment and that observed during the financial crisis is that in the current market the problem is declining stocks of USD liquidity rather than bank solvency. That is, the entire “pie” of market liquidity is declining and will continue to do so as the Fed retires excess reserves, and the issue has been how markets will allocate that shrinking pool of liquidity amongst the various market participants that require dollar funding. Higher bill issuance has exacerbated the problems stemming from a smaller stock of liquidity. Bills tend to absorb liquidity that otherwise might have been invested elsewhere: repo, commercial paper, and unsecured lending. The Treasury’s funding needs have increased and the deficit outlook continues to deteriorate based upon new fiscal spending and growth in previous commitments to mandatory spending on entitlements. Money market reform created new risks for prime money market investors, as allocating capital into prime money funds (which are the major source of supply of unsecured lending) now entails accepting liquidity risk, as floating NAV calculations and liquidity gates could deny investors access to their cash, and for potentially extended periods of time.

So there’s that. We’ll see what happens. Xccy basis contagion is key – “a lot of people are saying that” (to use another Trumpism).

We’ll get PCE this week and that will be some semblance of interesting coming as it does on the heels of the Fed.

Meanwhile, you should watch political developments in Japan. They have a vexing FX problem right now (more here), as the trade war jitters and the situation in Washington are conducive to flights to safety. The issue is that domestic politics in Japan is also conducive to yen appreciation and the political turmoil surrounding Abe doesn’t seem to be abating. The worse that situation gets, the more questions will be raised about the long-term sustainability of Abenomics and that, in turn, will catalyze still more yen strength. Needless to say, a plunging USDJPY presents a threat of its own to global markets.

I’d be lying to you if I told you I knew what to expect from the week ahead and anyone who says they have a good read on it is effectively suggesting they can predict what Trump will do next – that’s a dubious proposition for obvious reasons.

I’ll just leave it at that.


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