There’s no shortage of event risk in the week ahead. This is not going to be for the faint of heart.
Chief among concerns is of course Trump’s trade war, pre-announced last Thursday, much to the surprise and chagrin of damn near everyone, including investors.
The decision on steel and aluminum tariffs rattled markets and although some Trump surrogates have suggested it shouldn’t come as a surprise given Wilbur Ross’s recommendation and, perhaps more to the point, candidate Trump’s promise to try and restore lost “greatness” by propping up dying industries, everyone was assuming that rationality (or some semblance thereof) would ultimately prevail.
While some analysts are still holding out hope that the rhetoric will turn more conciliatory going forward, Peter Navarro didn’t exactly inspire much confidence on Sunday. Make sure and stay tuned to Trump’s Twitter feed or maybe Fox & Friends for the latest updates on this because if we learned anything on Thursday, it’s that unless you’ve got a direct line to Wilbur Ross (which I guess would mean having two Campbell’s Soup cans joined together with a string), the first people to know what the next step is are Fox anchors and Donald Trump (in that order).
The dollar managed to eke out a gain last week and it will obviously be in focus again as it’s being pulled between the twin deficit boondoggle and the administration’s weak dollar by proxy policy on one hand, and higher rates/a more hawkish Fed on the other.
We were having a perfectly nice low-volatility uptrend until Jan. 26, and everyone was happy. Since then, the inverse VIX ETN known as XIV has blown up (a great case of a “burning LOH” marker), and traders are starting to remember that stock prices actually can go down. So why now?
As with most bear markets and recessions, the blame goes to the Federal Reserve, which decided last year that it would start unwinding all of the QE buying of T-Bonds and Mortgage Backed Securities (MBS) that it had bought up from 2009-14. Last year, the Federal Reserve under Janet Yellen announced plans to start liquidating those bond and MBS holdings, starting at a rate of $10 billion per month in Q4 of 2017, and ramping up that rate by an additional $10 billion in every quarter to follow. So the target rate of sales for Q1 2018 is $20 billion per month, and it is supposed to ramp up to $30 billion per month in Q2, then $40 billion per month in Q3, eventually peaking at a $50 billion per month rate in Q4 and beyond.
Personally, I believe that the plodding, implacable Robert Mueller, white knight of the Deep State, will flush the Golden Golem of Greatness out of office, probably on some sort of money-laundering rap having nothing to do with “Russian meddling.” Anderson Cooper will have a multiple orgasm. Rachel Maddow will don a yellow hard-hat and chain-saw a scale model of Mar-a-Lago to the glee of her worshippers. The #Resistance will dance in the streets. And then what?
I doubt that Mr. Trump will go gracefully. Rather he’ll dig in and fight even if it means fomenting a constitutional crisis. He’ll challenge Mr. Mueller on veering into matters unrelated to alleged Russian pranks in the 2016 election. He may well attempt the self-pardoning gambit. He will have a lot of support out in the Deplorable gloaming. But, at some point, I expect a bipartisan consensus to emerge in congress that the guy has got to go. He’s making it impossible to conduct even the routines of bribery and domestic collusion that Washington exists for. Nobody is getting paid — at least not the bonuses they’re accustomed to seeing.
Yes, The Fed’s version of Rigor Mortis (aka, Fed-or Mortis) is setting in.
Mortgage applications increased 2.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 23, 2018. This week’s results include an adjustment for the Washington’s Birthday (Presidents’ Day) holiday.
The seasonally adjusted Purchase Index increased 6 percent from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 3 percent higher than the same week one year ago. The Refinance Index decreased 11 percent from the previous week.
Ok, so we got through the first of two Powell testimonies, and it went ok, all things considered. The message was mildly hawkish on balance and the result for yields, the dollar and secondarily, for stocks, was predictable.
The comments that set the tone came early on when Powell suggested that his outlook on the economy had improved of late and although he said he “wouldn’t want to prejudge” anything about the rate path, he noted that for him, the data “add some confidence to the view that inflation is movingup to target.”
“We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative,” he added.
Treasurys dropped on those comments as 10Y yields quickly moved above 2.90.
Zooming in on 2Y yields just as the comments excerpted above hit, you can really see the impact:
Divergent: It’s Dalio (And Asness) Versus Everyone Else as Money Flows to Europe Stocks (Fed Tightening As ECB Maintains Accommodating?)
Money is following to European stocks as jitters struck the US stock markets and The Federal Reserve continues to slowly normalize its monetary policy.
(Bloomberg) — Billionaire Ray Dalio has $18.45 billion in bets against Europe’s biggest stocks. Most of the rest of the investing world is headed in the other direction.
U.S. stocks lost $9.7 billion in investment so far this month while Eurozone shares have gained $3.2 billion, according to data compiled by Bloomberg. Peers of Dalio’s firm, Bridgewater Associates, are mostly wagering that Eurozone equities will rise.
“I’m surprised. That’s a big bet. Dalio and his team are very confident,” said Rick Herman, managing director of asset allocation who helps oversee about $30 billion at BB&T Institutional Investment Advisors Inc. “That’s definitely out of consensus. European stocks are cheaper, and they also have stronger earnings growth.”
Dalio has always marched to the beat of his own drummer, so his big short position, especially when other hedge funds are betting in the opposite direction, could be seen in that context.