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.
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.
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.”