Commenting on today's morning market tone, JPMorgan trader Andrew Tyler echoes what we said - namely that all eyes are on Pelosi - and writes that futures are lower with a global risk-off tone, surrounding Pelosi’s visit to Taiwan and the threat of potential military action from China. He continues:
her plane is scheduled to land around 10.20am ET. US reiterates the One China Policy. Senators from both sides of the aisle have visited Taiwan this year, including Democrats Duckworth and Menendez and Republicans Graham and Scott. Some of the Chinese response to those visits were military drills in the Taiwan Strait and military plane flyovers of Taiwan. Global investors are drawing parallels to RU/UKR and the potential for a shuttering of parts of the global supply chain. SPX was up ~4% On Feb 24-25, the first 2 days of the Russian attack; 10Y yields did not react until the week of Feb 28, falling more than 20bps.Bond yields are 1-2bps lower this morning, cmdtys are weaker amid a slightly stronger USD; cmdty weakness may be more tied to events in RU/UKR and economic malaise than the geopolitically-induced risk-off tone.
That's the bigger picture. Here is what actually matters in the next hour or two: according to JPM, and we agree with this, if Pelosi lands - and there is no immediate, tangible, "kinetic" response from Beijing (there will certainly be a delayed response but we can worry about that later), markets will rip higher:
While the Chinese response is unknown, the feeling yesterday among US investors was that an escalation that saw an immediate attack was unlikely and that parallels to RU/UKR may be off-base. Russia has been amassing troops and military vehicles for several months ahead of its Feb 24 incursion.
Also, over the last several years Russia had “de-dollarized” its economy, selling its US Treasuries and moving that money to gold. China still holds about ~$1T in US Treasuries and it is not thought that China has made similar moves with its military, relative to Taiwan.
Today, Pelosi’s plane is scheduled to land about an hour after the US opens; it there is no immediate reaction you may see markets move higher.
Add to that the massive buying "coiled spring" in the form of CTA buyback that is lined up this month - more on that in a subsequent post but here is a quick snapshot from Goldman...
CTAs are currently short -$11b S&P (covered $5b last week and $8b last month). Short Term Momentum (3948) and LT Mo (4066) are both firmly in positive territory creating a tailwind in the US equity market. MT Mo flips positive north of 4133 (keep this level up on your screens). In a flat tape CTA’s will cover an additional $9b S&P this WEEK. In up big tape this number grow to $14b and in down big tape this number shrinks to $4b (for the week). Over the next MONTH CTA’s will flip long in flat tape buying $19b S&P, and in up big tape (medium term momentum positive) this demand grows to $32b. In down big tape over next month -$7b for sale (only sell scenario).
.... and today could see stocks explode higher, unless of course we see other, more mushroom-cloud shaped explosions.