"This is the honeymoon," says former fund manager and FX trader Richard Breslow, reflecting on the buying panic in US equities overnight (despite lower bond yields, lower dollar, and higher gold). However, Breslow reminds the over-enthused: this is "not for the rest of your life."
Well I think we can all agree on one thing. It’s a good thing that the midterm elections are over. It was just too all-consuming an event to be healthy. Nothing short of war should grab the public attention to such an extent. It is a horrible shame that a democratically held election, conducted on a regular and guaranteed schedule, should inspire an analogy to a martial confrontation. But one thing that is clear is that whatever honeymoon period may ensue, it’s not all going to morph into some domestic and global love fest.
It’s a theme of the morning to say that with this event in the rear-view mirror, we can get back to trading the fundamentals. It matters not to interpret one day’s price action as connoting what these are. Markets may be somewhat good at discounting the future into current prices. But not that good. And events won’t cease to evolve in unpredictable ways. Personnel issues within the administration alone could be the first thing to rock the boat.
Let’s not forget that it wasn’t until Europe got in that equities decided to zoom and the dollar swoon. Until then, the commentary about what this all means was mixed. One conclusion that can be reasonably argued, however, is that this was a clear victory for the Republican party. The Blue Wave never materialized. The Senate is even more comfortably in red hands than before. That means, so is the judiciary. Foreign policy, including trade, won’t be materially affected.
It’s probably safe to infer that further tax cuts are less likely. And bonds should like that. At this point do we really need more late cycle stimulus and more debt to GDP? It’s disingenuous to argue the dangers of servicing an ever exploding level of Treasuries needing to be sold while also advocating for policies that ramp up issuance.
Infrastructure spending is apt to be negotiated in a more bespoke fashion on a case-by-case basis rather than as part of a grand theme. This isn’t going to be some version of a Grand Coalition. And issues like the budget and debt ceiling will only be further complicated. These are things that are more ambiguous for equities. Especially once traders focus on the fact that much of what has upset the international interpretation of domestic U.S. actions is unlikely to materially change for them. The executive branch has a lot of unilateral authority.
It’s also not unreasonable to posit, being in game theory mode, that we are entering a honeymoon period where the Democrats won’t be in a position to push back in the fashion that they will come the new year. Markets have a naive tendency to assume subpoenas will start being issued this afternoon. It might feel quite calm for a while. And, perhaps more importantly for markets, the G-20 in Buenos Aires at the end of the month, has become an extremely important event, where it is in everyone’s interest to make nice leading up to it.
In the preparations for the G-20, you are likely to hear a lot of agreeing to agree without substance attached. Details aren’t a nuance that markets will demand. Between that and a more benign bond environment, emerging markets could have a nice run. Which would make the dollar look offered. That should strictly be viewed as a tactical trade even if it lasts for a while.
Meanwhile, however things develop, as we head into this interregnum period, the S&P 500 futures are breaking above resistance, the dollar index is piercing support. Ten-year Treasury yields are toying with a key day reversal. All of those break-out points are now clear chart points to see if the market’s interpretation of events has legs.