I’m not sure you could call it “angst,” exactly.
Coming off the weekend, US markets behaved about like one would expect under the circumstances which, on the off chance you’ve been slumbering for the past week, are exigent.
Whether one wants to discuss the epidemic or the situation inside the Beltway, there’s light at the end of the tunnel. The problem is that, for now, “we’re still in that damn tunnel,” as I so eloquently put it last week. The promise of brighter days ahead as well as what is now a dual policy put (i.e., both a monetary and fiscal backstop), makes it difficult for equities to selloff in earnest.
But if it’s not outright “angst,” it’s most assuredly apprehension — or maybe “annoyance” is more apt. Markets are annoyed at the uncertainty hanging over Donald Trump’s final days, and apprehensive about the prospect of more violence. The FBI on Monday warned that armed protests are planned at all 50 state capitals and in Washington ahead of Joe Biden’s inauguration.
Democrats, meanwhile, are likely to impeach Trump — again. The only way around that is if Mike Pence invokes the 25th Amendment in the next 24 to 48 hours. The GOP blocked an effort to rapidly adopt a resolution to that effect Monday, but the House will return Tuesday for a roll call. Either we’ll have “President Pence” by Friday, or we’ll have a second impeachment. The House could then delay sending the articles to the Senate to allow time for Biden to settle in.
Underneath this cloud of abject insanity, stocks retreated from records. Tech shares suffered, as investors fretted over possible backlash from moves by Twitter, Facebook, Amazon, Google, and Apple to preempt additional political violence by, among other things, banning Trump and effectively putting Parler out of business, at least temporarily. Twitter fell nearly 7%.
Treasurys fell, again, although there wasn’t anything dramatic about it. Yields were marginally cheaper at the long-end.
“The underlying factors that drove 10s to 1.136% on Monday and contributed to the new year’s repricing remain solidly in place,” BMO’s Ian Lyngen and Ben Jeffery said, citing “a Democratic controlled government, potential for additional fiscal bailout funding, reflationary outlook for consumer prices, asset price inflation becoming thematic, and the slow, steady progress through the great pandemic of 2020.”
The dollar is going to be a story soon, and the tale will be the opposite of that which defined the balance of 2020. Real yields rose the most since June last week, and that may mean that further downside for the greenback will be limited, all medium- and longer-term “structural” bear cases notwithstanding.
“With 10-year breakeven rates already above 2%, a further rise in nominal yields will have to come from real yields instead of inflation expectations,” Bloomberg’s Ye Xie wrote Monday. “If real yields bottom the dollar probably will as well, given their positive correlation, so there’s likely to be some shakeout in short-dollar positions.”
I’ve cautioned on this repeatedly over the past 72 hours and quite honestly, I hope I don’t turn out to be right. Because markedly higher real yields would be bad news for stocks. Remember: Tech is, in many ways, the poster child for secular growth equity expressions tethered to the vaunted “duration infatuation” in rates. If you get weakness there tied to something unrelated (in this case jitters around the fallout from big tech’s push to crackdown on rhetoric with the potential to incite further political tumult), rising real yields would be insult to injury for those stocks.
Bitcoin had a harrowing ride to start the week, at one point posting the largest two-day drop since March. It didn’t help that the UK Financial Conduct Authority cautioned investors in cryptocurrencies that they risked a total wipeout.
“The FCA is aware that some firms are offering investments in cryptoassets, or lending or investments linked to cryptoassets, that promise high returns,” the regulator said. “If consumers invest in these types of products, they should be prepared to lose all their money.”
Crypto fans will make the usual jokes about the “establishment” being “nervous” and about the “powers that be” attempting to nefariously undermine the asset of the future. And those jokes will be funny. Right up until everyone does, in fact, lose all of their money.
As far the overall, 30,000-foot view is concerned, Nomura’s Charlie McElligott said Monday that we’re “in full-blown ‘overshoot’ mode.”
He cited Nomura’s Sentiment Index for the S&P, which is now in the 98.5th%ile.