Pardon Him

By Heisenberg

Markets gave Trump the benefit of the doubt to start the new week after a weekend that found the President spending what certainly seemed like an inordinate amount of time assailing various (and in some cases entirely imaginary) foes on Twitter.

Seemingly oblivious to the optics, Trump regaled the world on Monday morning with his thoughts on farmers, soybean taxes, “all sorts of trade barriers”, deficits, the constitutionality of the special counsel probe, his power to pardon himself and “Witch Hunts” that he says are being conducted by “conflicted” Democrats and unnamed “others” who he says are “angry” at him for reasons he didn’t specify.

That went on for nearly three hours.

Despite that, stocks were fine, seemingly content to ignore the incessant rantings of a guy who is now openly suggesting that he’d absolve himself of responsibility for crimes he committed on the off chance anyone actually ends up producing proof of those crimes and seemingly resigned to the notion that, as Goldman put it over the weekend, “US trade policy is a conundrum.”

As humorously detailed earlier in “Of Coffee, Covfefe And Vodka: Why One Strategist Is Thinking About His Former ‘Swedish Colleagues’“, it almost seems like Trump has accidentally managed to strike a tedious balance.

12-week high for the S&P:

SPX

10Y yields back to 2.94:

10Y

As Bloomberg notes, “the Eurodollar selloff resumed with reds and greens lower by 5bp; in options, demand continues to be skewed towards downside as rate-hike premium is clawed back into the front end [and] in OIS, an additional 57 basis points of Fed hikes is now priced in for the rest of the year vs 51bp before strong May jobs report on Friday.” 

That reminds me, if you think back to a couple of weekends ago, we did a post on the Fed’s efforts to normalize the mode of the curve, highlighting some commentary from Deutsche Bank’s Aleksandar Kocic. Well consider the following excerpts from Kocic’s latest in the context of the Italian turmoil, last week’s haven bid for Treasurys, the repricing of the Fed and the quoted Bloomberg passages above which suggest some of last week’s action is being tentatively reversed in light of the jobs report and the renewal of the risk on move:

Perversely, an abnormal political situation is accelerating normalization of the rates market. Last week’s turbulence marks another step towards migration of shocks to the front end of the curve, the operational mode we have identified before as the normalization of the rates landscape. The figure shows the change in vol ratios between 2Y and 10Y tenors in the second half of May. Financing the upper left corner vol with its long tenor counterpart was one of the best- performing RV trades.

VolRepricing

The mechanism behind this rebound of short-tenor vol has been a combination of several factors. The potential for triggering a European crisis is stabilizing for the US long end. At the same time, credit shocks are transmitted through the short end of the curve, and their reverberations through the US market have been mostly the front-end issue, both due to potential revisions of the Fed path and due to cross-hedging. Additional volatility has been supplied by short covering of the massive Eurodollar curve shorts.

The dollar was basically flat, paring losses as the day wore on:

DXY

Europe’s relief rally continued as investors and traders are apparently satisfied that the populists in Italy got the message when it comes to what’s going to happen to the BTP market in the event they try to push the fiscal profligacy envelope too far. And look, conspiracy theories about ECB deviations from the capital key notwithstanding, the bottom line is that Italian assets sold off last Tuesday because a populist government isn’t market friendly, plain and fucking simple and everyone assumed that League would only get stronger in the event the country headed towards new elections, so when the last ditch effort to salvage the Five Star-League coalition government was successful, some folks bought the dip.

It10Y

Here’s a snapshot of the DAX and the broad Stoxx 600 that kind of gives you some perspective in terms of how things have evolved in light of recent events:

Europe

Italian equities were lower on the day, while the IBEX continued to climb as investors bet that new elections won’t upset Spain’s relationship with Brussels. For what it’s worth, here’s a detailed breakdown from Barclays on cross-asset reactions to the Italy turmoil:

ItalySellOffInContext

Oil fell below $65 amid more signs the OPEC is prepared to increase production.

WTI

The Turkish lira held onto gains logged early in the session after predictably bad inflation data set the stage for another rate hike later this week.

USDTRY

Also notable, Monday was the best day for the Nikkei in more than seven weeks:

Nikkei

Oh, and then there was this:

President Trump’s planned meeting with North Korean leader Kim Jong Un will take place at 9am Singapore time on June 12.

Finally, for your moment of zen, Sarah Huckabee Sanders is this close to losing her fucking mind…

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Gary

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