The Daily Prophet: Corporate America May Be Turning on Trump

Connecting the dots in global markets.

Business executives and investors tolerated the unpredictability of the Trump administration in 2017 because, at its core, the White House was pro-business: It aimed to cut taxes and reduce regulations. But now that the White House has made tariffs a priority, it's clear that the last thing markets want is a trade war.

Stocks worldwide fell on Monday by the most since March 1, as measured by the 1.07 percent drop in the MSCI All-Country World Index. The S&P 500 Index had it worse, falling 1.42 percent in its biggest plunge since Feb. 8. Yes, the Federal Reserve is poised to raise interest rates again this week and there are jitters in the technology sector after reports that a political advertising firm retained information on millions of Facebook users without their consent. But when a coalition of more than 40 business groups send a letter to President Donald Trump warning that any sweeping trade action against China could raise consumer prices, increase costs for businesses and hurt stock prices, it's worth taking notice. “Simply put, tariffs are damaging taxes on American consumers,” U.S. Chamber of Commerce Chief Executive Officer Thomas Donohue said in a statement.


The market's concerns can be seen in measures of volatility. The VIX futures curve, which tracks the implied volatility of the S&P 500 over time, is in backwardation, meaning that near-term contracts are more expensive than those over longer term. The VIX futures curve is typically upward sloping, an acknowledgement that that the outlook for equities is generally more uncertain over long rather than short time periods.

CREDIT WARNINGS
Another worrisome sign for investors is that the credit markets are weakening. Yields on investment-grade U.S. corporate bonds have risen to their highest levels since September relative to Treasuries. When the so-called spread widens like it has now, it's a sign that investors demand higher relative yields to compensate for the risk of losses. “When we see a widening of credit spreads, it’s always a problem,” Matt Maley, a Miller Tabak equity strategist, told Bloomberg News. Short interest on the iShares iBoxx Investment Grade Corporate Bond ETF, ticker LQD, relative to its U.S. equity ETF counterpart is now at its highest on record, according to Bloomberg News' Dani Burger and Sid Verma. To be sure, few predict a looming credit crisis. Many companies have taken the opportunity in recent years to extend the maturities of their debt, meaning so-called rollover risk has been reduced. The number of companies at risk of a downgrade has fallen for 15 straight months, while the number of issuers poised for an upgrade stands at 344, the most in a decade, the analysts at S&P Global Ratings wrote in a research note earlier this month.


BREXIT BREAKTHROUGH
The U.K. pound was in the foreign-exchange market spotlight Monday, gaining more than any of the other more than 30 currencies tracked by Bloomberg, as Brexit negotiators confirmed a transition deal had been reached. On an intraday basis, the pound rose to its highest level since June 2016 versus a basket of nine-developed market peers. Even so, analysts are not ready to turn bullish on sterling. Aberdeen Standard Investments and Rabobank are among the firms that see any pound appreciation as brief, given longer-term challenges faced by Britain, including that of reaching a trade pact with the EU, according to Bloomberg News' Charlotte Ryan and Anooja Debnath. Next up for sterling is the Bank of England’s meeting Thursday, with investors watching for hints that the central bank is ready to raise interest rates as early as May. A hawkish shift in stance is largely factored in for sterling. Money market pricing edged up after the transition deal announcement to give an 84 percent chance the bank will raise borrowing rates in May, versus just 5 percent at the start of February.


COMMODITIES ARE SLIDING
The market for raw materials is back on the defensive. The Bloomberg Commodity Index fell on Tuesday by the most since March 7, dropping to its lowest level since Feb. 14. Metals and agriculture products are bearing the brunt of the recent selloff. Benchmark spot iron ore with 62 percent content sank 3.3 percent on Monday to $67.05 a metric ton, according to Mysteel.com, as traders fret about record holdings at China’s ports and concern that demand may disappoint, according to Bloomberg News' Krystal Chia. Prices have sunk 16 percent from the multi-month peak in February, and Barclays forecast that they will probably drop back into the $50s a ton as mills’ profitability in China ebbs. There’s about to be enough sugar piled up in warehouses to make three chocolate cakes for every person in the world, according to Bloomberg News' Marvin G. Perez. Supplies are booming thanks to the outlook for record harvests in India and Thailand, the world’s No. 2 exporter. The glut has already sent futures in New York to the lowest since September 2015. Hedge funds are gearing up for more losses by holding the biggest net-short position, or bets on declining prices, in six weeks.


PUTIN FAILS TO IMPRESS FX MARKET

Russian President Vladimir Putin won a landslide victory, gaining a record 77 percent of the vote. The currency market wasn't impressed. Traders pushed the ruble down by 0.59 percent, the most of more than 30 major currencies tracked by Bloomberg. Although some of the decline can be attributed to the drop in oil prices, as Russia is a major exporter of crude, there is growing concern that the nation will face stricter sanctions amid rising tensions with the U.S. and Europe. That would be tough on an economy that is stagnating after the longest recession in two decades. The Central Bank of Russia meets Friday and is widely expected to cut interest rates 25 basis points to 7.25 percent after inflation rose 2.2 percent in February from a year earlier, well below the target of 4 percent. Russia’s campaign to use its latest Eurobond sale to repatriate Russian money squirreled away in foreign bank accounts turned out to be a bit of a flop, according to Bloomberg News' Neil Denslow. Novel measures including priority treatment for local investors and a clause allowing buyers to receive interest payments in rubles only succeeded in luring about $200 million from rich Russians, just 5 percent of the total sale.


TEA LEAVES
It's been a horrible 12 months for Australia's currency. The local dollar has depreciated 6.74 percent in the time against a basket of nine other major currencies, according to Bloomberg Correlation-Weighted Indexes. Only the U.S. dollar has fallen more against the basket. So, what is the Reserve Bank of Australia thinking about the currency's decline? Markets may get some clues Tuesday when the RBA releases the minutes from its meeting two weeks ago. At the time, policy makers left interest rates unchanged at a record low of 1.5 percent. They’re trying to prolong a hiring boom and soak up spare capacity in the labor market to generate faster wages growth. While Australia dodged the slump due to massive resource demand from an industrializing China, its economy is sluggish now due to record-high household debt and weak wage growth that have slowed consumption and inflation, according to Bloomberg News' Michael Heath.

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