As the S&P careened sharply lower last month amid incessant trade escalations and the daily exchange of recriminatory rhetoric between Washington and Beijing, investors were once again forced to ponder when the vaunted “Fed put” would kick in.
Presumably, the Powell Fed became more protective of risk assets in 2019, having seen enough turmoil during Q4. At the same time, market participants assumed the “Trump put” would likely kick in sooner or later, where that means that past a certain threshold, the president would attempt to smooth things over with Xi in the interest of arresting the slide in domestic equities.
“Weak markets motivate friendly policy and strong markets do the opposite”, BofA wrote last month, describing what the bank called “countercyclical protectionism”.
JPMorgan’s Marko Kolanovic weighed in with a similar take on May 16. “The ‘Trump put’ has now evolved into a ‘Trump collar’ (i.e. limited upside due to escalation of the trade conflict)”, he wrote, adding that the “Trump put” was probably “3-4% out of the money” at the time.
Read more: Marko Kolanovic: The Trump ‘Put’ Is 3-4% Out Of The Money
Fast forward to the end of May and it seemed as though Trump had stopped responding to declines in stocks. Rather, he had become something of a black box, leading Deutsche Bank’s Aleksandar Kocic to make the following observation:
At the moment, the market is not fully convinced about the existence of near-term circuit breakers in the political channel. There is an open communication channel between the markets and the Fed — the two are fully adaptive, both relative to each other and relative to politics, politics remains non-adaptive — the information flows from politics to the Fed and markets, but does not flow back.
That prompted Kocic (and others) to suggest the “Trump put” might not kick in until a recession came calling.
Well, for what it’s worth, in the June edition of BofA’s Global Fund Manager survey (which betrayed a sense of bearishness not felt since the crisis), respondents said they expect the Fed to cut rates if the S&P falls to 2430 – on a weighted average basis.
(BofA)
At the same time, investors said the S&P would have to fall to 2350 in order to force Trump to seek a comprehensive trade deal.
Those “strikes” (as it were) may be too low.
On Tuesday, markets enjoyed what appears to be a new “Draghi put“, delivered in Sintra. Trump, amusingly, wasn’t pleased with “Super Mario”, who the US president accused of aiding and abetting currency manipulation.
Lost on Trump was the fact that Draghi’s remarks also lifted US stocks. If Trump were really a brilliant strategist, he would at least consider the possibility that Draghi’s promise of more ECB stimulus in fact serves to put pressure on Jerome Powell to lean dovish, lest the Fed should come across as increasingly out of touch not only with pricing at the front-end, but with reality in general.
The irony, then, is that Draghi may well have helped ensure the “Fed put” kicks in sooner rather than later, something Trump has been trying to achieve for months.
But, in his zeal to engineer a rally in US shares more “bigly” than the rally in the DAX (which he decried in a tweet), Trump revealed that he will in fact meet with President Xi at the G20, where the two leaders will try and sort out the trade dispute. That’s the “Trump put” kicking in.
And so, US equities surged to one of their better days in months, on the promise of a trade deal and dovish central banks.
With all of the above in mind, one can’t help but wonder if respondents to BofA’s FMS survey are about to get caught wrong-footed in the event the Powell Fed surprises on the dovish side and Trump does in fact decide to deescalate the trade war.
As Michael Hartnett notes, FMS cash levels soared to 5.6% in June from 4.6%, “the biggest jump in cash since 2011 US debt ceiling crisis.”
(BofA)
The race to the bottom (rates / currency realignments ) is now in full ahead mode… The attempt to engineer an equity rally is now in full ahead mode…. The voices of sanity have plain run out of things to say….Guess we just watch the rest of this movie…
Exactly one year ago, on the 14th June 2018, the ECB triggered a rally like today when it announced that no rate hike was in sight before September 2019. Dax made +3.5%. That was the last Dax roaring, since that day it kept drifting lower the whole summer, and before the 2018Q4 meltdown it was already down 8% from ATH.
I’m not saying Dax will go down in the same way from tomorrow. What I state is that all the ECB dovishness had not been enought to offset the deterioration of Chinese fundamentals, and the partially linked auto tariff issues. Indexes now can be supported by expectations that a new QE is taking off, and make even new all time highs in the next weeks. We know that the mechanical effect of QE on stocks is debated, it probably acts on assets more through beliefs and expectations. But what matters is to see if China is able to reengineer a serious recovery. And if EPS in the ndx/spx don’t increase either we have a bubble followed by a crash, or stocks will keep struggling to break decisively current levels. After all since 18 months indexes keep bumping against these levels and then retreat. In the eurozone the overnight – one month euribor is almost 40bp negative. Excess reserves range from 600bn to one trillion daily. Banks don’t lend, borrowers have no viable project, and there is no credit demand. Some banks instead of paying the ECB rate on excess reserves buy bunds at are pushing their yield at the same euribor rate or that rate charged by the ECB on excess reserves, still 40bp negative. This is not a sound economy. Central banks are scraping the bottom of the barrel. If they fail even now, we will see a very bad bear market in 2020-2021. July earning season will tell us more anyway.
I was wrong , the voices of sanity have not run out of things to say…Nice analysis Franceska
I agree with George. Nice analysis Franceska!
This is definitely feeling like 1999 and 2009.
Only without the sock puppets and no-docs.
Indicies back at highs, year to date gains respectable for full year, sell-in-May seasonality, increasing volatility, some econ indicators turning down, bond market warning signs: derisking looks prudent even if that means briefly underperforming should “puts” trigger.