What Really Matters?

What Really Matters?

Headlines were sparse on Sunday as the US lazed around through the holiday weekend. Summer has unofficially arrived.

The European election results were the marquee event, but parsing them in real-time is an exercise in futility. Everyone knows what’s at stake. This time, it matters.

Marine Le Pen appears to have handed Emmanuel Macron a stinging defeat in France, where Republic on The Move garnered 22% of the vote, versus 24% for Le Pen’s National Rally. Turnout was higher versus five years ago, likely benefitting Le Pen.

Merkel’s CDU/CSU won in Germany, although at 29%, support was markedly lower than 2014. Obviously, there’s more to get to than that, but all in good time. “According to the first official EU projection based on the exit polls, the two big alliances will make up 43% of the seats, down from 56% in 2014”, Bloomberg wrote, adding that “populist parties look set to win 29% of the Europe-wide vote, slightly down from 30% in the current Parliament.”

Analysts and political pundits will now spend the next 48 hours attempting to decide whether the populists and nationalists did or didn’t make the kind of “splash” they were aiming to make. Euroskeptics will claim they raised hell. The establishment will roll its eyes. Cue Miller’s Crossing:

We still don’t know whether any of this matters, though, do we? Recall this, from last week:

Market participants used to marvel at the extent to which political tumult never seemed to translate into sustainable spikes in market-based measures of volatility. Charts plotting various measures of policy uncertainty (“politicians’ implied vol.”, as it were) look like a polygraph from 2015 forward. But if you plot, for instance, rates vol. on the same axis, you get a sense of just how effective forward guidance has been in making sure geopolitics run amok didn’t spill over into asset prices.

The overarching point in “I’ll Die Unhedged, Thank You” (from which that excerpt is pulled), was to suggest that 2019 might be different. That this time, geopolitics will matter. That monetary policy can’t possibly cancel out all the noise. Not in a world on the brink of an economic cold war. Not when the US is drawing up contingency plans for a hot war with Iran. Not when the European project is still embroiled in a rolling, existential crisis.

But maybe that’s wrong. If the choice is between underperforming at the risk of going out of business as your peers chase yield and harvest carry (secure as they are in the idea that come hell or high tariffs, volatility will remain indefinitely suppressed by policymakers), well then what choice have you? You can burn premium and sit on Trump’s Twitter feed hoping for an escalation big enough – a tweet so crazy that it renders all central bank assurances inadequate – to make your year, but that seems futile. On Saturday, the US president cited Kim Jong-Un, a nuclear-armed, murderous despot, in the course of calling a former US vice president a moron. Nobody cared. It’s just par for Bedminster.

That said, May hasn’t been particularly kind to stocks. European and US equities are headed for their first monthly loss of the 2019. We all know why: Trump and trade.

Growth concerns are proliferating. Yields in Germany are back to -10bp. If you ask BofA, they’re headed to -25bp later this year. “Mark it zero, Dude”. “Mark it to misery.” The DAX has held up relatively well this month, but German equities are highly exposed to trade tensions. Meanwhile, Hong Kong shares have caught the Mainland flu.

“Those who trumpet the small impact of tariffs on GDP and those who will spend years assessing the incidence (i.e., who pays) of tariffs are both missing something important: the large, immediate, and negative impulse that tariffs and tariff fears have on high frequency data such as trade, industrial production, business investment, PMIs, and the many highly correlated financial asset prices”, Credit Suisse’s James Sweeney cautioned on Thursday.

As Sweeney wrote in April, the mere fear of tariffs results in “momentum shocks” to growth. When the outlook is cloudy, the high frequency data rolls over, often to the detriment of financial asset prices. Nobody wants to hear about how, according to a couple of academic studies, the mechanical effects of the tariffs should be manageable, when Trump is in the middle of a multi-tweet tirade. Based on the indicators mentioned above, Sweeney says we’re “already deep in the trenches of a trade war.”

(Credit Suisse)

The paradox is that the worse the data, the looser is policy, and looser policy is good. “Don’t forget about central banks”, the title of Barclays’ week-ahead FX preview reads.

“With no high level talks scheduled between the US and China until the G20 meeting, this week could see the market focus on monetary policy”, the bank wrote Sunday, adding that the current real rate is generally accommodative in most economies” and where it’s not, the data will force a relent. “Of the countries where current rates are above neutral, we forecast that the data will print below central bank forecasts in the US, South Africa, and Korea”, Barclays says.


The longer the trade war drags on, the more likely the data is to disappoint. The more disappointing the data, the more compelled policymakers will be to ease. The easier policy is, the better for risk assets. What really matters for risk appetite? Is it the price of money and the promise of abundant liquidity, or the perception that politicians are inept?

The quandary is always the same. The more stifling the geopolitical backdrop becomes, the more tempting it will be to come off the sidelines and ride the accommodative central bank wave to easy money.

It’s 97 degrees here on the island Sunday, but the breeze is up and the water’s cool. It’s too hot to go out, but too nice to stay in.


2 thoughts on “What Really Matters?

  1. Aren’t we really looking at a Honda Accord with shocks so worn that a spring is about to break after 600000 miles? In other words, at some point we will observe a tolerance to the stimulus drug, like we now see in China? The long term dynamic is right there to see in Japan. But the global economy can’t be Japan. Obviously everything breaks down. The “coordination” in the EU demonstrates how the consequent destruction of natural nation to nation correlation might hobble a system lacking vision to recognize excessive homogeneity and its consequences.

  2. what really matter is growth and corporate earnings. if these turn negative, central bankers won’t be able to stem the tide. look at 1987, 1994, 1998, 1999, 2010, 2012, 2015, early 2018 , early 2019 as examples where central banks stepped in during a “crisis”. markets quickly recovered because the economy and corporate profits continued to grow. in 2000 and 2007, central bank intervention was not effective because the economy and corporate profits were rolling over. I went back and read articles from 2000 and 2007. I wanted to see what caused that markets to recover in March 2000 and Oct 2007, before they fell again. in both cases, it looks like the markets had confidence that fed lowering interest rates would boost the economy. or that the fed could “contain” the problem. the housing crisis was well know and discussed in 2006. what ‘s also interesting when reading articles from the time was the discussion of the inverted yield curve. exact same discussions as today. “what does it mean?” “every time in the past it has predicted a recession. will this time be different?” in both 2000 and 2007 the deterioration in the economy was too much for the fed to overcome, and earnings fell by 50% as did the stock market (SP500). nasdaq more like 80%. keep an eye on the economic indicators. if they roll over, so will the market and central banks won’t be able to stop it, maybe lessen the impact (maybe) , but the market will fall in line with the projections for forward earnings, plus some multiple comtraction which will be dependent on the magnitude of the earnings decline.

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