Turn Around, Bright Eyes

We may be hitting peak holiday / max exhaustion for investors, but while everyone is asleep on the beach, the sun is not beating down upon them benignly. Oh no, the sands are shifting. We now know:

  1. Trump reality is setting in

He’s a man who has always divided and conquered, when it comes to his cadre of employees. The only people he truly trusts are his family. He will continue to recycle through people until he will end up with just a few trusted lieutenants in key positions. Ivanka for Fed Chair? Don’t rule it out.

That’s only a half joke, and is a reminder that Yellen’s time is running out – hence planning further moves from the Fed here is tricky.

  1. The Fed are on hold, for now

The Fed Minutes this week showed a clear division between those who continue to be worried about anemic inflation, and those who sense that financial stability is at risk from loose conditions. Even with the hikes that have taken place, the ongoing stock market rally / tighter credit spreads mean tightening has been neutralised. Cheap money is still with us.

  1. The ECB are not doing anything fast

It looked as if they were gearing up to signal their taper. But with Merkel looking comfortable into the German election, maybe the ECB don’t need to be as aggressive on their return to “normal” policy as they had first thought. Not least because the sniff of a move in that direction took the Euro up to the year’s highs. As the ECB minutes revealed this week, this has rattled them:

“The appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-a-vis the rest of the world” but “concerns were expressed about the risk of the exchange rate overshooting in the future”

Again, cheap money stays with us.

  1. Brexit reality is setting in

The UK government is putting forth position papers. Not unsurprisingly, the EU isn’t agreeing to it all immediately. The fact is that we will run on and on with this until the clock ticks down to midnight and the UK’s hand is forced. Of course, if Theresa May hadn’t decapitated herself with an unnecessary election and thus rendered any negotiation strategy impotent, this could have been different. But this is now the course we are on, and money will start to ebb away from the UK as the arguments roll on.

So, what can we conclude?

  • the UK and the US are looking politically unattractive investment destinations.
  • The G4 central banks arbe backing away from having to do anything much. Interest rates are therefore less of a driver
  • Volatility can remain suppressed by the continued cheap money party. But finding good carry at good valuations is becoming increasingly difficult. So volatility remains prey to the unexpected. Which takes us back to the political risk dimension.

Check out this chart of the USD vs DJT’s approval ratings:

We have previously discussed that the last few months have been a tussle between the economy, carry and politics as the driver. With the first two now subdued, the latter can step into the spotlight.

Just as the lights go out.

Enjoy the total eclipse on Monday. Weirder things have prompted market corrections.

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