“Truth makes many appeals, not the least of which is
its power to shock.” Jules
Renard
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Brexit 2.0
The market participants who listened to mainstream
media concluded a Clinton victory, prematurely and mistakenly. Similarly, the
consensus view that a Trump victory would lead to a market sell-off forced
money managers to hedge against downside moves. Well, when the score was
settled with a Trump victory, the overblown-fear subsided amd the "fear"
bets took off quickly. Sell-side analysts that jumped into gloom and doom
regarding Trump were badly off. The consensus was proven wrong again,
like Brexit. And, like Brexit, markets spurred upward rather than down.
The collaborative effort between the media to paint
Trump as having no chance really backfired. But outside of the agenda
driven politics, it was shocking to see the assumption that a Trump victory painted
as a negative to markets. These were reckless predictions considering a
well-documented, strange election cycle and a very strange Fed induced market
cycle, as well.
Truly, those making big calls now are setting up for another
deadly assumption, at least before deciphering Trump's cabinet. A week ago, to
tell an average investor that Trump will win and markets will end the week up
over 5% would've cause a shocking or
utterly dismissive response. Oh, what a humbling week (for those that can
confront the truth) for those digesting surprises.
Super Disconnect
For years on this blog, there has been one disconnect
that's been repeated too many times as a key theme: the disconnect between the
real economy and financial markets. If the Fed was right that the economy
was healthy, then a Trump victory would seem less possible. The
failures of the establishment are not only evident by Democrats losing the
White House and Congress, but a new wave of attacks (from financial industry
experts) against centeral banks may follow. Similarly, the upcoming
elections in Europe are bound to see more Trump/Brexit like results, as a
referendum to the status-quo. The current modus operandi, where large companies
benefit from government organizations while small business continues to bleed
via hefty regulation, is now a political matter. In fact, it is at the
forefront of discussions where policy changes maybe plausible. Similarly, Trump
speaking against Yellen should rattle the markets and the failed policies of
all central bankers, and not be limited to just the US. Now, we’re
entering a period where central banks are going to face even more scrutiny from
the GOP and Trump. The paradigm of low rate, low volatility and endless headfakes
regarding rate hikes are really tiresome, and an unorthodox leadership in DC
can challenge the status-quo more than before.
Risk Management
To jump into infrastructure and related themes in the
US, temptations are plenty. Observers are ready to see a rising Dollar, a
potential shift in interest rates and other mega shifts as a result of a Trump
presidency. Yet, a GOP congress is nothing new for markets and “hope” of a new
administration does not materialize quickly into policy or an expected script.
Thus, it’s better to grasp where the market is and where it came from before
going too far in guessing where it will go. The broad indexes flirting near
all-time highs and still a mostly suppressed volatility and a bullish bias is
the bigger story. Sustainable or not is the same question that’s been asked for
a while, and still those questions linger. The bond markets are flabbergasted, debating
between more fiscal spending being dangerous versus some seeing more spending
as good for the real economy. These early theses and conclusions need a
little untangling before doubling down bets on stock or bond market directions.
Article Quotes:
“Chinese sovereign bonds headed for the longest losing
streak in three years, driving the yield curve to the widest in two months, as
accelerating inflation and signs of an improving economy damped demand for the
safety of government debt.
The difference between the yields on one- and 10-year
government notes, a measure known as the yield curve, rose to 67 basis points
on Monday. The gap has been forced apart by a surge in the longer-term yield,
with a central bank effort to reduce leverage in the financial market and a
global selloff adding to the pressure.
China’s economy held ground last month following new
measures to cool property markets in almost two dozen big cities, with
industrial production matching September’s pace of 6.1 percent. This follows
data last week that showed factory-gate inflation exceeded estimates and the
consumer-price index rose the most since April, reducing the odds of an
interest-rate reduction. China’s debt selloff comes amid a $1.2 trillion global
bond rout on speculation Donald Trump will increase spending to boost the U.S.
economy, stoking inflation and leading the Federal Reserve to raise interest
rates.” (Bloomberg, November 13, 2016)
“Investors are expected to pour a net $157 billion
into emerging markets by the end of the year, according to the Institute for
International Finance, seeking relief from the rock-bottom yields prevailing
elsewhere around the world. But Mr. Trump’s election has changed that calculus.
His emphasis on infrastructure spending and tax cuts has sparked a rally in
U.S. stocks and sent benchmark Treasury yields sharply higher. With
better yields now available in developed markets and expectations that the
Federal Reserve could have to raise key interest rates more aggressively,
rather than the slow and gradual approach many analysts had been expecting,
investors have a more compelling case to keep their money in the U.S. Emerging
market stocks and bonds suffered about $2.4 billion in outflows over the past
week, with much of that cash exiting since the election, the IIF said.” (Wall Street Journal,
November 13, 2016)
Key Levels: (Prices as of Close: November 11, 2016)
S&P 500 Index [2,164.45] – The
index experienced a sudden spike after several down days. August 15, 2016 highs
of 2,193.81 are on the radar. On one end, the all-time highs are not far removed;
however, the upside may be short-lived. Buyers and sellers will have to battle
out their views in the test of conviction ahead.
Crude (Spot) [$44.07] – Crude failed
to hold at $50. Clearly, the supply-demand dynamics suggests that $50 is a hurdle
rate for Crude. Output is high and demand is not quite as robust. Thus, the
sideways action ahead is not surprising.
Gold [$1,236.45] – After peaking in July, the downtrend for gold continues.
Technical support stands around $1,240.00, but the commodity did not hold. Some
buyers may find the entry point here attractive, but the momentum is hardly
positive.
DXY – US Dollar Index [99.06] – The Dollar had an explosive
post-election response. The Dollar is moving closer to peak levels from 2015
and the momentum remains strong.
US 10 Year Treasury Yields [2.15%] – Yields finally broke
above the 2% range with a sudden spike. Previous resistance at 2.20% has proven
to be a hurdle. Interestingly, LIBOR has been rising, as well. Observers await
a post-election spike or a notable shift in bond markets.
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