…And then you look at markets.
They are mightily confusing, not least of all with the VIX index continuing to rise – it closed at 15.07 yesterday, up by 1.02 – without any signs of concomitant selling in the major US equity indices. In the immortal words of Star Trek’s Vulcan first officer Mr Spock, “That is illogical captain”.
Perhaps step back one pace and account for the fact that global politics are running at full speed while the marketplace itself is largely depopulated of its key movers and shakers in the run-up to the Easter break. When markets are thin and liquidity is low it is easier to justify going defensive, especially given the ongoing doubts about the strength of the much-vaunted relation trade.
Markets are sometimes like little children who need constant entertainment. “Calm down and be quiet” is wasted just as much on a four-year-old full of Easter egg as it is on a couple of hundred thousand market participants full of PhDs, MBAs and CFAs. That said, markets are still trying to work out whether President Trump is a genius disguised as a buffoon or just a buffoon. The inconsistency of his actions has supporters celebrating a new political paradigm while detractors just see an oversized kid in an oversized candy store.
DAYS
Talk of what might have been achieved in the first 100 days has faded as things have been moving at lightning speed in some areas and not at all in others. I’d also point out that he has only been in the White House for 82 days so far. Sunday, April 30 will mark the completion of the first 100 days of the Trump presidency. So whither the great Trump relation trade?
Goldman Sachs’ stock price, maybe the largest and most garishly yellow of that bevy of canaries in the reflation coal mine, took off after the election from around US$181. Since then it peaked at an intraday trading high of US$255.15 and closed last night at US$227.74. That looks like a pretty significant reversal to me and it certainly has all the Fibonacci bells ringing. Note maybe that US$217.18 would represent a 50% retracement. JP Morgan, incidentally, at US$85.73 is also closing in on the 50% retracement and another US$4 off the stock price would get us there.
Is it too early to declare a failed presidency? Of course it is. 82 days into a 1,460-day term is a bad time to be ringing the closing bell and, as previously observed, not many first-term presidents have got their heads around the workings of Washington in such a short time. Trump may have made a lot more noise than most of his predecessors but I’m not sure that he has achieved a hell of a lot less.
He might have caught the press corps wrong-footed with his rather overenthusiastic embrace of social media and all that might be new and untested in the nation’s capital but United Airlines CEO Oscar Munoz will go down in corporate history as the man who got them completely wrong.
Times change and standards of behaviour change with them. Richard Nixon did not fall because of what he had done at Watergate. He fell because what would have been normal practice 20 years earlier had run out of acceptability by the time he did what he did. John F. Kennedy would, with his battered health, his economy with the truth and his general behaviour – nod-nod, wink-wink – not have made it onto a municipal school board in today’s world, let alone have engineered a successful run on the White House.
I digress.
YOU REALLY GOT ME
I was speaking on Monday to one of the most senior figures in the London government bond market. We were talking about the Fed and its putative shrinking of the balance sheet. He was quite sanguine about them letting their bond holdings run off without any active sales until I pointed out that whatever runs off at the Fed will still have to be refinanced by the Treasury and that other investors will have to be found to absorb the US$3trn-plus that the Fed will no longer hold. One could hear the ticking of little brain cells and the gradual formation of an “Oh? A-ha!”
The man in question is no fool and yet the implications of the Fed not reinvesting its redemptions had clearly not as yet sunk in. The debt will not simply go away just because the Fed isn’t buying it. It will of course take years for the full Fed holdings to expire, and not all of what they hold on their balance sheet is Treasuries, but global markets are going to have to find one hell of a lot of money to replace not only the Fed but the ECB, the Bank of England and, of course, the BoJ as bond investors.
US 10-years at 2.29% and Bunds at 0.19% tell us that markets are either ignorant of the risk or that they don’t really believe that the central banks will ever be able to step away from their role as investor of last resort. I was quizzed quite recently why I proposed to an investor to remain underweight bonds but long of duration, the answer to which is out there for everyone to see.
WHO’LL BE NEXT IN LINE?
Meanwhile the French presidential situation has, and I must admit to my total surprise, taken another and rather unexpected turn. The rise of the hard-left Jean-Luc Melenchon and the slowing of the momentum of Emmanuel Macron has, and not at all unjustifiably, spooked markets while pushing the Bund/OAT spread back out towards 80bp. Ten days to go and everything to play for in round one. Analysts are still trying to get their head around the possibility of a Le Pen/Melenchon run-off, perish the thought. The closing of the gaps in round one also brings the possibility of voters actually opting to reconsider Francois Fillon as the lesser of several evils and the only viable candidate to count on workable support in the National Assembly.
This is not about not being able to trust the pollsters; it is about whether or not one can trust the French voter. I still believe it will be a Macron/Le Pen second round and I believe even more that it will be Macron who carries the day but with my hard-earned sous I’d rather buy a bond in Single B rated Burger King France than place a bet on the outcome of the French presidentials.
Finally, I read that British business leaders are bemoaning the lack of access to Theresa May. The loved all their meetings with the Coward Cameron but sense that May is fully stretched with Brexit. Well what a surprise. The one they so loved is the one who got the country into this mess with an ill-thought-through referendum question and no plan for what might happen if he lost it. May did not become PM by challenging Cameron; she chose to pick up and run with the poison chalice that he put down and ran away from the moment it was poured.
So there we are. Odd markets and an odder political backdrop. Remember it is Easter week and try not to take any movements and relative value anomalies in markets too seriously. On Tuesday we get real again.