Last week's ebullient equity market rally (in China, Europe, and US) after Trump raised the specter of 100s of billions more in trade tariffs left many scratching their heads - especially in light of the collapsed in the yield curve and safe-haven bid for the long-end of the bond market.
As former fund manager and FX trader Richard Breslow notes, after a brief two-week break from the perceived reality of tick-by-tick headline-interpretation:
"Having assiduously read the news and analysis from outlets of record on three different continents, you can imagine my surprise and chagrin in seeing my screens chock-full of asset prices that are either unchanged or 'happier' than when I left."
Years of quantitative easing and sovereign wealth funds picking winners and losers has turned the vigilantes on page one into mere cynics when it comes down to the mundane task of buying and selling.
Do we really think the fix is in? Apparently so. Despite all the uptight people out there, the message, time and time again, is to just go with the flow. It sounds great, but central banks should remember the famous words of General Colin Powell, “If you break it, you own it”.
So if there is no informative value in the traditional risk-on and off trades and everything is ultimately meant to be risk-on, what is worth following for some bigger picture view of investors’ mental state?
Certainly the Treasury yield curve. The 5s/30s spread sitting near 20 basis points is a sign of true skepticism lurking in the weeds of a stock market attempting a retest of all-time highs.
There is nothing innocuous in the inability of duration to command any sort of premium. Nothing else tells a truer story, nor makes the dots more interesting. I for one look forward to Fed Chairman Powell’s testimony later this week. He’ll do fine, I just wish I could be the one asking the questions.
The dollar has had a strong second quarter. It looks like it is running out of steam.
Forget the yen. More broadly speaking, there’s no momentum. I doubt it has anything to do with everyone else gaining escape velocity, nor the possibility that the ECB will take away the punch bowl a year from now by erasing 10 basis points of negative yield. The currency is sitting right on an inflection point. If everything is great, the dollar shouldn’t fail here.
Lastly, at least for today, continue to watch the great Mexican peso rally of the AMLO era.
The 21-long club is now projecting something in a 16-short.
If that happens you can be sure of one thing. It remains business as usual.
However, there is one area of reality in the world, as Breslow notes. Having been away for two weeks, I must say, I’m grateful for the best efforts of Turkey’s President Erdogan.
At least the lira has had the intellectual honesty to cheapen with the story line. Of course, it’s stable today just to play with me. The downgrade was, after all, priced in, I’m told.