Remember what I said last night?
No? That’s ok, I wouldn’t either were it not for the unfortunate circumstances that forced me to give up Balvenie forever.
But for those who are still free to imbibe and thus perhaps prone to forgetting what was and wasn’t said on Saturday and Sunday evenings, here was our assessment of how market participants might attempt to pacify themselves by leaning on the “one-off” characterization of the Syria strikes:
The knee-jerk in USDJPY right out of the gate on Sunday evening probably says a little something about the extent to which it’s helpful to have a 48-hour shock absorber when it comes to helping markets cope with something like an escalation in an overseas conflict.
There’s a certain utility in waiting until markets are closed on a Friday evening to announce things that have the potential to spook traders.
Although the “one-time shot” characterization of the airstrikes on Assad’s chemical weapons facilities looks like it’s going to be welcomed by markets, there’s more to not like about this situation than there is to like, that’s for sure. For one thing, tensions between Moscow and the West flared further over the weekend, with the Kremlin decrying the attacks and watching as the U.N. Security Council rejected a Russian resolution that would have condemned the airstrikes.
Notably, UN Ambo Nikki Haley said Sunday that Mnuchin is all set to announce new sanctions tomorrow on Russia that “go directly to any sort of companies that were dealing with equipment” related to Assad’s chemical weapons. “Everyone is going to feel it at this point,” she warned.
Well, fast forward to the U.S. session and although the bounce in USDJPY was faded and although European equities are lower, there’s nothing to suggest that anyone is too worried about a further escalation in Syria or about any spillover from pain in Russian assets.
First thing Monday morning, Donald Trump raised the specter of a currency war (apparently a trade war and a shooting war aren’t enough for him – he needs to complete the trifecta) by accusing Russia and China of “playing games”, in a bizarre tweet considering the circumstances surrounding the ruble’s collapse and also considering the Treasury’s decision to avoid naming China a currency manipulator on Friday.
When it comes to the new sanctions on Russia, it looks like Haley might have gotten a little ahead of herself or, more likely, Haley repeated what she had been told and then Trump decided to walk it back. “We are considering additional sanctions on Russia and a decision will be made in the near future,” Sarah Sanders says in a statement Monday morning.
As a reminder, Mnuchin essentially bailed out the ruble last week as the currency legged even lower following Trump’s infamous “missiles” tweet – ol’ Steve said he’s sticking with the plan to not target Russian sovereign debt for the time being.
“Our sense was that many large international investors refrained from any desperate exodus of Russian bonds last week,” SocGen’s Yury Tulinov and Phoenix Kalen write, in a new note.
Record high foreign ownership (34% of Russia’s ruble debt) will likely mean it stays insulated from sanctions, but the “nuclear option” of targeting OFZs will hang over Moscow’s head as long as tensions with the West are running high.
Yet through it all, markets are relatively calm to start the week, a situation that former trader and current Bloomberg columnist Richard Breslow calls “all too familiar not to be believed.”
After documenting how the world collectively inhaled on Friday as the U.S., the U.K., and France launched coordinated strikes on the Assad regime, Breslow notes that despite an escalation in the rhetoric over the weekend, on Monday morning there was little evidence that investors were harboring “an abundance of caution.”
Here are three bullet points from Breslow’s longer note – long story short, the legacy of the central bank “put” lives:
- This recurring pattern inevitably leads to the tedious discussion of what haven assets are or aren’t doing in response. The answer is nothing. It is a noble but futile exercise to try to explain events by finding something that has moved a bit and imparting some greater meaning to it other than randomness
- Safe havens are hedges. And we all know, no one hedges anymore. It just hasn’t proven to be worth the cost. Being lectured by yet another central bank, as the chorus was joined by the Reserve Bank of Australia in their latest Financial Stability Review, doesn’t help. Or change anyone’s behavior
- Investors realize that monetary authorities are just as deeply into these trades as they are. And the current zeitgeist built up over the entirety of the post-financial crisis world expects policy-makers to be the ones responsible for keeping the balls in the air. No pain, no gain became gain with no pain. It has been just too great a strategy to call the bluff of those advising caution
