Trapped in a political vortex

6 min read

The recent optimism, whether expressed in equities by the Trump Jump or in bonds by the Trump Dump seem to have somehow rather run out of steam. Sceptics might suggest that the new president himself has wiped the lipstick off the pig.

Although it is my principal objective to focus on markets, the tidal flows in global politics clearly remain in the spotlight and trying to read the runes of the former without some grasp of the latter would be like trying to dig the foundations after the rest of the house has already been built. Hence the observation that, despite today bringing the first FOMC meeting of the year, nobody – or very few of us at least – seems to care about what is going on at the Fed. Cast your mind back six months and markets were trading up and down based on what any of the FOMC members said during an after dinner speech. That alone tells us all we need to know, which is that until some stability has returned to Washington, London, Paris or Berlin, we are all trapped in a political vortex where economic realities are temporarily only of secondary interest.

So far the Donald – he hasn’t even been in the White House for two weeks yet – has shaken every tree and rattled every cage other than the one markets were most excited about: the revision of the corporate tax regime and the regulatory overload. Appointing Supreme Court justices is all well and good but it really is not an issue of the highest priority. On that subject, whether Neil Gorsuch is a smart candidate or not is beside the matter and one upon which even I have to admit to not being qualified to opine on. What I do note, however, is the Democrats are already planning to make the passage of appointment as difficult as possible.

While the mood in the British House of Commons’ opening debate on the Brexit bill yesterday was always overshadowed with the “will of the people” argument, Capitol Hill appears not to have cottoned on as to why the country is now in the hands of President Trump. The Democrats seem hell-bent on continuing with the childish tit-for-tat sniping, which in large part led to the populist uprising at the ballot box.

Up Hill

At a time when Congress is most needed to perform its checks and balances role, it is set to go into partisan trench warfare over the nomination of a Supreme Court judge. Has the White House done this intentionally to make Capitol Hill look as though it really is still the same old swamp and not the Hill which should be overseeing the White House but the other way around? Is Trump maybe out-politicking Congress by offering the Senate its first opportunity to make itself look superannuated and therefore irrelevant? Or might it be that that the Gorsuch appointment is the point where the new administration finds itself mired with a deeply controversial border control and immigration policy and, so far, no economic or fiscal roadmap to show? In case you missed it, only four of Trump’s senior appointees have so far gained Senate confirmation. That’s no way to run a railroad.

Meanwhile, Peter Navarro, the very much self-styled head of the White House National Trade Council, has blithely declared Germany’s excessive trade surplus to be a sign of a “grossly undervalued” currency. Mutti Merkel pushed back, restating that the euro’s exchange rate was the province of the ECB and that the German government has nothing to do with it. To a certain extent they are both right; it has always been better to be partially right than absolutely wrong. Yes, Germany has benefitted from the weak euro but a large part of those gains have been ploughed back into keeping the currency union alive.

Washington might begin to get its way on the back of the release of the EU’s January CPI number which flashed up at +1.8% on the year, now within spitting distance of the ECB’s 2% target. CPI is a bit like cholesterol in that there is good CPI and bad CPI and cost-push inflation isn’t much liked but inflation it is, one way or the other. The flushing out of the basis effect of last year’s low oil price with its concomitant disinflationary effect is a bit of a free gift but it firstly won’t go away and secondly it will spread the sense that maybe the worst is over and the ECB will be constitutionally obliged to begin to reverse some of the stimulus measures it still has in place. When the dollar was at €1.04, the big bets were on parity being the next stop. As at the time of writing, €1.08 looks to be within the realm of possibility and from then it’s no more than a hop, skip and a jump to €1.1050, the average for the past 12 months. The euro might still be a long way from being the destination of choice for flight-to-quality merchants but the temptation to own it again must be growing.

China remains closed so no smoke signals from that end although Hong Kong has returned. The Hang Seng ended down 0.18% - next to nothing - so anybody hoping for some special impetus after four days of sitting back and thinking will be disappointed. There remains a lack of compelling trades out there so the temptation remains to sit back and simply clip coupons while reading the political section of the papers… and the travel section too, of course.