T-day has arrived for markets, says Bloomberg's (and former FX trader) Mark Cudmore, warning that Trump’s speech to Congress will probably terminate the last vestiges of market hope for early inflationary action from the new administration.
It’s not a done deal though. He could still surprise positively. It seems improbable given his track record, but it’s the possibility that’s kept this moment in focus as being so critical.
Expectations have been guided much lower during the past few days, which has lowered the bar for Trump to exceed them, on the headlines at least Trading shouldn’t be an emotional business, but it so frequently is. Too often, traders find their reasoning evolves to suit their positions rather than their positions evolving to match fundamentals.
This has led more and more people to start saying that the rally since the election was not really to do with any hopes of Trump stimulus, and purely about a clear trend of improving economic data.
Just like the most-effective fake news, there’s a large core of truth to this. Since last summer, there has absolutely been a clear trend of improving global growth – this column has covered the topic frequently.
However, a look at any relevant chart, whether it’s equities, bonds or currencies, shows Trump’s victory was the binary moment that changed investors’ outlook. And that huge paradigm shift in outlook hasn’t yet been fully unwound.
Trump’s address is likely to be the catalyst for the ultimate capitulation. It may take a few days, as he is a performer and will be sure to deliver some exciting soundbites. He may announce an expansionary budget even if there are less clear tax or infrastructure details than once hoped.
The problem for those still clinging to Trump-fueled reflation trades is that Congress will be crucial in approving any budget. And there’s insufficient evidence to have faith that he is fully in tune with Republican lawmakers.
We note that while European uncertainty is likely playing some role, exuberant VIX shorts have started to unwind in recent weeks...
And Open Interest is surging, suggesting positions being built on hedges...
As Mark Cudmore conclude rather ominously:
"Trading on the back of U.S. stimulus could be a dead theme by Friday."