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Friday, April 14, 2017

Gold is higher and nearing the round number $1300 for the first time since the election.

The FX market was as moribund as it’s possible to get almost on other day Wednesday, with the average high-low at about a third of the normal range… and then the dollar index tanked from 100.75 at 3:05 pm to 100.21 at 4:05 pm. The trigger was a WSJ article published at 3:11 about Trump saying the dollar “is getting too strong” and he would prefer the Federal Reserve keep interest rates low. He might re-appoint Yellen. The newswires picked up the story within minutes. The euro jumped from 1.0593 to 1.0673 in a single hour. Every currency showed the same reaction. Look Euro below:

The dollar was not exactly thriving before the Trump interview, but geopolitically motivated risk aversion that drove it down the day before was moderating somewhat, hence the narrow ranges. Risk-off sentiment was moderated by a phone call between Trump and Xi in which Xi indicated a peaceful resolution is possible. Meanwhile, Secy State Tillerson had a contentious visit in Moscow, but Putin did show up in the end, avoiding an outright insult.

We seldom see the FX market roiled by so many factors all at once and it’s really rare for geopolitical events to move the market so much. And it’s unprecedented for the US president to jawbone the dollar. Treasury Secretaries, even a Fed Gov once in a while (Greenspan), but the president? Never. Trump also made a full reversal on a number of other issues, not just Yellen. Now he supports NATO, the Ex-IM Bank, China as not a currency manipulator, ending the hiring freeze right after it began, and a few other things. The lack of consistency is appalling.

Risk aversion can be seen in many forms. Gold is higher and nearing the round number $1300 for the first time since the election. Gold rose over the 200-day this week. Oil retreated on factors from both supply and demand. More war in the Middle East can disrupt supply, and demand can be seen in the form of EIA crude stocks, a draw of 2.17 million barrels in the latest week. The API had a draw of 1.3 million the day before. Nobody noticed. The VIX is on the high side above the 200-day for the third day, and still near the levels of last November.

In China

China exports rose by 16% y/y in March (the fastest pace in two years) while imports rose 20% for a trade surplus of $23 billion.

In Australia

The jobs report was far better than expected, a gain of 61,000 jobs,triple the Bloomberg forecast. And Feb was revised up from a loss to a gain, Full-time jobs rose and part-time jobs fell, the best combination. The unemployment rate is the same 5.9% but with a better composition and the participation rate edged up to 64.8% from 64.6%.

Euro Outlook:

The euro jumped from 1.0593 to 1.0673 in a single hour after Trump expressed a preference for a weak dollar. It proceeded to a high of 1.0677 overnight, but since then has retreated to a low of 1.0621 at 7 am. This is far more than the usual profit-taking pullback after a big move. It may mean jitters over the French election are more deep -seated than we thought. The premium of French paper over German is high at 72 bp but no longer rising. We changed our signal anyway on last night’s close, but as usual, a new signal is not to be trusted.

The other Outlook

The Reuters 10-year yield index closed at 2.294% from 2.298% the day before, pretty tame, and is quoted at 2.223% this morning. The yield was 2.60% a month ago.

 The Bund yield fell further to 0.174%  from 0.212% wednesday morning and 0.245% last Friday morning.

Market Outlook:

If you want a weaker dollar, let risk aversion on geopolitical matters do the job (Just Joking!). But there’s another way to drive the dollar down—have Trump say directly that’s what he wants. With all that was going on the other, he managed to squeeze in an interview with the WSJ. This is appalling. Most analysts are too polite to say so, but the president of the United States should not interfere with markets.

It is wrong to boost stock prices of companies taking actions Trump approves and even worse to manipulate the currency market, especially since he doesn’t understand what the hell he is talking about. He said yesterday “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting—that will hurt ultimately. Look, there’s some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good. It’s very, very hard to compete when you have a strong dollar and other countries are devaluing their currency.”

This is not only factually incorrect. It’s outright delusional. The dollar was not getting strong because of confidence in Trump. It was not strong at all and any firming tendency was due to the prospect of rising yields on a more hawkish Fed. And a strong dollar is not good because it “sounds good.” It’s good for inspiring confidence in the US among international investors and reserve holders.

Somebody educated Trump on Ex-Im not being a “featherbed” and on China not being a currency manipulator, presumably TreasSec Mnuchin. Yesterday Trump said China hasn’t been a manipulator “for several months” and besides, he needs to avoid annoying the Chinese because it might jeopardize his talks with Beijing on North Korea. As for Yellen, he said he had some talks with her. Now she is no longer “toast.” He likes and respects her… but it’s “very early.” In other words, Yellen has not agreed to prolong the easy money environment due to political pressure.

We have a long history of presidents poking their noses into Fed affairs. Large tomes have been written about presidential interference with the Fed (Nixon) and how Fed chiefs have responded (Volcker). Greenspan was a good Fed chairman, despite his many faults and hobby-horses, because he completely flummoxed both presidents and the Congress. The Fed and other central banks are independent for the very good reason that presidents tend not to understand monetary policy and have a different agenda. We trust central banks in large part because they are independent and central bankers are the most visible and important public servants that can be trusted to take actions for the greater welfare of the public.

 If Trump thinks he has tamed Yellen, he is sadly mistaken. We say Yellen is still toast. Just wait for the next Fed hike and see what he says then. The market doesn’t believe Yellen will cave, either. The CME Fed Watch tool shows the same probability of a June hike as the day before—58.9%.

Some folks imagine that Trump keeping so many balls in the air and not dropping any (this time) is actually fairly impressive. He also impressed with appearing to “normalize” his presidency, meaning a reversion to conventional Establishment norms. This is exemplified by holding a rare (if not unprecedented) press conference with the NATO chief and saying NATO is no longer irrelevant—a direct contradiction to the campaign stance. The implication is that other NATO members have started to pony up their dues, which is not actually true, although some have said they will aim for meeting their contractual obligation.

Another potential Trumpian win is a new order ending the hiring freeze, with new hires needing to conform to the new budget constraints. Reducing the size of government overall is one form of “draining the swamp,” another campaign promise, and it is going forward. Failure to appoint hundreds of the Deputy and Assistant cabinet posts is still a black mark, though.

Trump reversed direction on other things, too. He reversed direction on the Ex-Im Bank from the campaign stance—now it’s a good thing. He will not name China a currency manipulator, a campaign promise for Day 1. And saying on TV “we are not going into Syria” contradicts the campaign version of “America First” in which that phrase means no foreign entanglements. It’s also not true. We are already in Syria to the tune of some 1000 special ops troops and daily bombings since 2014.

It’s ridiculous to accept the idea that ordering the bombing the poison-gas airport makes Trump somehow more “presidential” and all these other new stances are a good thing. They may be more conventional, but we can’t count on him sticking to the new stance and in the end, just put impulsive, erratic behavior and the absence of true policy on display for all to see. A pivot to a more conventional Establishment stance on NATO, Ex-Im Bank and other matters is not “presidential,” It’s erratic. Changing direction on campaign promises is only to be expected, but not admitting it is dishonest and an insult to the voters who believed the promises. Outright lies are still not acceptable, and also unacceptable is an incoherent foreign policy muddied up with “trade deals.”

 Bottom line, far from Trump “normalizing” his presidency, Trump is persisting in a pattern of disruption for its own sake. The strong risk-off sentiment we saw develop on Tuesday looked overdone and might have retreated a bit on Wednesday, but now the prospect of a further retreat is out of the question. We may have to wait for a couple of weeks until after the Easter holiday to see how much risk aversion retreats. But in a single day yesterday, Trump made it clear that risk aversion is here to stay because he cannot be trusted not to cause a ruckus with ill-informed and even bizarre changes in position, a total lack of anything resembling “policy,” and interference in international financial markets. We predicted the dollar would fall on Trump’s election. He is uneducated as well as ill-informed and susceptible to fake news, as well as impulsive and egotistical. Other day's behavior is consistent with those judgments and one can only fear there is more to come. Russian Foreign Minister Lavrov said comments coming from the US are “primitive and loutish.” He’s right.

We are not alone in seeing a major and probably long-lasting rise in risk aversion. Bloomberg reports “The Credit Suisse Fear Barometer, which measures the cost of buying protection against declines in the S&P 500 Index, neared an all-time high this week. The higher the reading, the more expensive it is to buy protection relative to upside calls…” The Fear Barometer “jumped 46 percent this month through Tuesday, when it reached 45.74. That’s about a third of an index point away from its June 2016 peak ahead of the Brexit vote.” Bloomberg has a series of scary charts demonstrating the rise in risk aversion. Here is the simplest one:

We got an interesting take on the French election from a European Reader, who expects more surprises. “… even if the population should realize that it is great time to move away from presidents only thinking about their girlfriends and own portfolio, I fear Macron is a bit too green to get the seat this time.” The French can be overly influenced by the “buzz” about who is where in the latest polls. “… Melanchon is doing well (at the level of Fillion in the last poll), which could attract more support, in fact for no reason except that the press is talking about him just at the right time.”

“Some strange persons have been elected at the head of large countries recently, but still the press refuses to understand the motivation of the choice of the farmer in the mid-west, or the farmer in France, and keep considering themselves as too smart… Dej√† vu, unfortunately… the end was not good.” We take this to mean our Reader sees a Trumpian outcome in France. “Strange persons,” indeed.

The behaviour of the euro in recent days may indicate that a large number of persons also see an unhappy outcome in France. The euro failed to rise by much on rising risk aversion—nowhere near the move in the yen, for example. And even yesterday, it’s barely hanging on to wednesday’s highs.

The FX market will be open in the US today, although most Western markets will be closed for Good Friday. London is closed on Monday, too. Today in the US we get “PPI Final Demand” and jobless claims, but tomorrow it’s retail sales and inflation, more likely market movers even if nobody is around to respond.

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