As a recalcitrant Trump doubled down on how harshly he was being treated the equity market burned. It was reminiscent of Suetonius’s classic of Rome burning whilst Nero fiddled. And that is pretty much what happened today. Trump railed about how harshly he was being treated, how it was dumb and that he could not do what he wants to do and his constituency lapped the goodies up.
Unfortunately, and maybe finally markets are coming to the conclusion perhaps Donald is the great pretender and not the sage he believes himself to be. Europe and Asia appear to be questioning the marketing material. Yes, Donald was great at marketing and the U.S. are by far are the best marketers but after a while even poor products become exposed. That is what happened today, a little doubt arose and a fire was lit. The fire has not become a bonfire yet and can be easily doused but the stage is set. Trump and the GOP are now on notice, get some Policy out there and let’s see some work being done to garner some Democrat support so that Bill’s and in particular Tax Reform and Bank reform go to the Senate and are passed.
With so much distraction the overseas investors led the way for the selloff and reluctantly U.S. investors did likewise. The tone was set in Asia with the Dow futures falling some 106 points and the rage was maintained into the New York opening. On the day, the Dow fell some 370 points or down 1.78%. Volatility jumped the most since the Brexit vote. The political uncertainty and lack of Political Agenda is causing this ruckus.
Bonds were quick to pounce after rallying some 4 bp in the Asian time-zone, the U.S. 10 year closed today at 2.22%. The probability of a Fed hike as indicated by Fed Fund futures fell overnight from around 66% to 56.7%. This fall is meaningful as the political uncertainty will once again slow the wheels of productivity to a grinding stop and if nothing else cause a slowdown in the U.S. economy. CEO’s will be reluctant to do anything in this current environment. The U.S. treasury curve flattened with the 2/10 in 4.9 bp to close at 97.4, the 2/30 were in 2.3 bp to close at 166.60 and the 10/30 widened 2.5 bp to close at 69. The 10 year bund rallied about 5 bp to close at 0.373 and the 10 year OAT 0.75 in 5 bp. Political uncertainty and concerns about growth prospects are now driving markets and the bonds are reacting with a degree of scepticism that has not been seen for a while. Portfolios are being reweighted with an emphasis on paring back risk. As long as this trend continues bonds will rally and equities will weaken. Optimism is changing and one should carefully evaluate the markets at present as opportunities will arise.
Trump has certainly Trumped the markets and it will be interesting to see how he deals with an economy that is flailing about. How will Trump add direction and certainty, at this early stage unfortunately the task looks beyond his team’s abilities. Trump needs to rapidly get his house in order leave his stage persona behind and knuckle down as the CEO of a large public company rather than act as if Government is there at his whim and is his own personal company. If not expect markets to become extremely disappointed and the stage would then be set for a major correction. Markets are looking to Trump to release policies and work with both the GOP and Democrats to realise his vision.
Commodities were largely unaffected by today’s events. Oil rallied 0.8% to close at $49.07. U.S. oil inventories fell and that was the reason behind the rise in oil prices. Base metals were mixed with Copper falling, tin rising and lead falling. Iron ore staged a rally. The news of the day was a possible merger of Thyssen Krupp and Tata Steel however this is being complicated by Tata’s $ 19 billion UK pension scheme. Gold gained 1.9%.
The U.S. Dollar index fell 0.5%the lowest since November 8. The yen rose 1.9% and the euro rose 0.6%. Capital appears to be flowing in the direction of risk off.
The Aussie Market Today
The Aussie dollar should benefit on the day. After Australia was reaffirmed AAA, this political uncertainty will aid the vulnerable $A. The pick-up in iron ore prices will help the Aussie as well. The indicator to watch is Chinese and Indian demand, and as long as these two countries are willing buyers then there is capacity for the Aussie to strengthen.
Equities are likely to be weak but maybe not too weak. The factors affecting the U.S. are very different to Australia. However, equities were down about 1% earlier this morning on the futures and that probably will be the level the market opens so a fall of another 20-30bp could be expected.
Bonds will be strong on the day. Market forces and risk off trades will prevail and I expect this trend to carry through the course of the day. Political uncertainty is driving the flight to safety and without much else economically to think about bonds will rally for a while yet. World growth once again is under the microscope.