Trade Roar
The Donald is at it again. In a series of pronouncements, the President has called out his perceived foes for threatening his economic program. The Federal Reserve has come under the gun for raising rates. China and Europe are being chastised for manipulating their currencies. This drivel is hardly surprising considering its source, but markets are tasked with interpreting it anyway.
Forget for a moment that the reason for the U.S. dollar rally is Trump's own tax reform, which has produced a sugar high of growth and employment. Forget also that the flight to quality from the emerging market sell-off is supporting the greenback. Also forget that the momentum investing crowd is chasing the winning trade in both the currency and the stock market.
You only have to look at this through a political lens.
Trump is simply speaking to his base. All normal analysis is subordinated when his irrational motivation is analysed.
Trump is just doing his job.
When I used to manage money, I would often have a repeated conversation with one of my partners about the decision-making of politicians. He was constantly amazed by the statements coming from various elected officials. I would counter with the observation "the job of a politician is to get re-elected - not to do the right thing"
Given that the half-life of a politician is about two years, it will only get worse over the next year. The upcoming Mid-Term Congressional elections threatens hand back power overt the House to the Democrats, ensuring a repeat of the impasses that characterized the Obama presidency. If Trump wants to get anywhere on his legislative political agenda and help save GOP jobs, he will have to hurry. He needs a China deal on trade and fast.
So far the trade issue has so far been more 'roar' than 'war'. The market's upward bias since the beginning of the year shows that stocks have yawned at the dire predictions of an economic slow-down stemming from the tariffs.
Given low rates, improved retail sales and strong earnings, I can't blame them. Stocks are looking through the rhetoric and we are now seeing the political motivation to get deals done. Mexico will be first, as the intractable issue of agricultural has now been pulled off the table. Canada will have to wait its turn as our obsessive politeness is now working against us. Trump has bigger fish to fry.
The ultimate irony of any potential China trade deal is that it will weaken the dollar as the flight to safety unwinds emerging markets bounce and hard assets rally.
So the crowded U.S. Dollar long position has been put on notice. They are starting to pare back their positions already. Any substantive progress on trade will end the party. The Shiny Coin just became just a bit tarnished this week.
Additionally, a Fed pause in the pace of rate hikes is now more likely given Atlanta Fed Governor Bostic's recent pledge to not invert the curve. He joins Bullard, Kaplan and Kashkari in the anti-inversion camp. Powell will have some tricky policy messaging in next week's Jackson Hole meeting. He will have to back off the rate hike throttle unless the ten year yield starts to rally. Backing off would not enhance his credibility following Trump's comments.
But the 10 Yr yield refuses to budge. The enormous speculative short positions are helping keep rates low as bond price declines are being used to cover positions and global differentials also continue to suppress yields. Talk about a rock and a hard place. This is Powell's biggest test so far.
It looks like an overbought correction in risk off behaviour is here, but that is far from a trend change. The economic and monetary forces that support the case for U.S. economic dominance are powerful and entrenched. Eurozone economic surprises have mean reverted from their first half weakness, but they have a long way to go before their economy becomes as strong as the U.S.
We need the trade roar to die down first.
Risk Model: 3/5 - Risk On
My call last week was to look for a "V" shaped bottom in copper and gold. I think we just got one. My other call, to sell the U.S. market, isn't looking so good. The model's indicators haven't changed for weeks but the market keeps drifting higher as the weakness outside of the U.S. is being ignored. We are seeing a last gasp rally to new highs as sidelined investors chase the momentum. AAII sentiment comes out each Thursday and I will be watching for any signs that investors are moving back into the game in the post-holiday period. I think they are.
Also, watch bonds closely is response to the Fed messaging from Jackson Hole. The "Squeeze Play" ( Aug 7) is still potentially on. An October-November sell off is setting up nicely should the curve completely flatten.