Under Siege (A Special Set Of Blinders)

Given the increasingly glaring disconnect between markets and the real world, I suppose it’s only fitting that US equities managed to hold onto gains Wednesday despite chaos at the Capitol.

The day began with Democrats claiming victory in Georgia, where Raphael Warnock and Jon Ossoff managed to pull off what, right up through Election Day, many still believed was highly unlikely: They flipped the state, capturing both Senate seats.

By noon, the runoffs and an accompanying rally on Wall Street were relegated to some place below the fold. Donald Trump, during a rally in D.C. scheduled to coincide with Congress’s certification of Joe Biden’s Electoral College win, told thousands of supporters he would “never” concede. Subsequently, a mob descended on the Capitol, breaking into the chambers, and sending lawmakers scurrying for their lives (literally).

Several officers were injured and at least one was hospitalized. One person was shot and killed. There were multiple reports (from NBC and The New York Times, for example) concerning the discovery of improvised explosive devices.

Mike Pence, who earlier in the day refused to comply with Trump’s demands that he unilaterally declare Biden’s electors void, urged an end to the violence.

Ultimately, Trump dispatched the National Guard, after encouraging supporters to remain peaceful — as though he hadn’t himself incited them to violence just hours previous. “I am asking for everyone at the US Capitol to remain peaceful,” he said. “Remember, WE are the Party of Law & Order.” By that time, his supporters were already roaming the halls of the Capitol looking for lawmakers to “chat” with.

Trump also assailed Pence. “Mike Pence didn’t have the courage to do what should have been done,” he said, in a tweet sent towards the end of the Capitol siege.

In essence, Trump endeavored to show lawmakers (and the whole country, really) just how much chaos he’s capable of sowing if he chooses to do so. It was a truly lamentable day in D.C., and it was made all the more so by the fact that the congressional Republicans who indirectly participated by turning the president’s unfounded claims of fraud into formal objections, had no mathematical hope of sustaining those objections.

Just after the closing bell on Wall Street, the FBI was deployed.

It seems trivial to mention stocks in all of this, but… well, here we are. The S&P, which had surged as much as 1.5%, closed up around 0.6%. Small-caps, excited by the prospect of a Democratic Senate, outperformed handily.

Banks jumped more than 6% in a truly stellar session, emboldened by the prospect of a steeper curve, better growth, and the pro-cyclical spirit more generally.

The chaotic scenes at the Capitol weren’t sufficient to catalyze a safe haven bid for Treasurys — not on a day when rates were hellbent on pricing in the blue sweep. It was almost as if bonds had scheduled this selloff and nothing short of an asteroid strike was going to stop it from unfolding.

The long-end was cheaper by nearly 10bps, the selloff largely undeterred by the turmoil. Futures volume in Treasurys was twice the 20-day average. 10-year breakevens hit 2.09% at one juncture. The 5s30s breached 140bps.

“The debate has now shifted to just how far the move can run before either reversing or at least transitioning to a period of consolidation prior to embarking on another selloff,” BMO’s Ian Lyngen and Ben Jeffery wrote Wednesday afternoon, noting that “the chatter has been around whether 10s make it to 1.20% or 1.40% — both eyebrow-raising numbers from our perspective as the present momentum supporting higher rates appears to be quickly running its course.”

For what it’s worth, I wholeheartedly agree with the “eyebrow-raising” characterization. Without trying to sound alarmist, if 10s make it to 1.40% anytime over the next two weeks, equities will have a very difficult time digesting it. That’s too far, too fast, for stocks trading at stretched multiples.

If Friday’s NFP report looks anything like Wednesday’s disappointing ADP print, a bid for Treasurys could materialize, if for no other reason than it would underscore the extent to which vaccine rollout simply cannot keep up with COVID and the economic fallout from the associated containment measures — especially not when the vaccination timeline is running behind schedule and states are identifying cases of the more transmissible UK variant.

As much as it’s tempting to carry on about the macro implications of a Democratic Senate, the unfortunate bottom line on Wednesday afternoon was that nobody cared about anything other than the chaos at the Capitol.

Stocks’ resilience was perhaps not wholly surprising given that we live in a world where financial assets (and especially equities, that sacred cow that must be protected lest the mythical “wealth effect” should slam into reverse) are an island unto themselves, floating on a sea of central bank liquidity.

Still, “Angry mob storms Capitol, lawmakers flee” is a headline that shouldn’t be conducive to risk taking in markets.

In their wrap, Bloomberg had a great quote from Adam Phillips, director of portfolio strategy at EP Wealth Advisors. “Apparently, elevated investor sentiment knows no bounds,” Phillips remarked. “Obviously, the reflation trade stemming from [Tuesday night’s] election results is driving the markets, but it takes a special set of blinders to ignore what we are seeing in real-time.”

It sure does. But remember, Adam, this has been going on for a long, long time. Janet Yellen perfected it (red highlight in the figure below).

“Given the degree of civil unrest during the last twelve months and the flashpoint represented by the runoff Senate elections and transition of the administration, it’s surprising there hasn’t been a greater flight to quality thus far,” BMO’s Lyngen remarked, calmly.

Trump on Wednesday afternoon tweeted an unconscionable video message. Despite telling his supporters to “go home,” he reiterated that the election was stolen and essentially repeated the remarks he made earlier in the day which sparked the Capitol siege in the first place. Twitter flagged it with this message: “This claim of election fraud is disputed, and this Tweet can’t be replied to, Retweeted, or liked due to a risk of violence.”

Eventually, Twitter and Facebook suspended the president. Further violations could result in a permanent social media ban.

Joe Biden, who promised to be a president for all Americans, not just those who voted for him, was not generous in his characterization of Wednesday’s events. “It’s not a protest,” he said. “It’s insurrection.”