The Daily Prophet: Markets, Political Capital and Burned Bridges
To understand why markets are suddenly less enamored with President Donald Trump's policies, it's best to look at what he's not doing rather than what he is.
Yes, markets shouldn't be surprised that he is following through on campaign promises to build a wall along the border with Mexico, tighten immigration, repeal Obamacare and rework trade deals. Yet those moves matter less to markets than cutting taxes, reducing regulations and coming up with an infrastructure spending plan. Already, the divide in Washington seems so wide that strategists at BMO Capital Markets said there is a risk is that Trump will spend all of his political capital on these initial moves, leaving too many burned bridges to push through his pro-business agenda. The more the process is mired in political infighting, the lower the probability of meaningful fiscal stimulus anytime soon, they warn.
Ray Dalio, who runs the world’s largest hedge fund, said he was concerned that the damaging effects of Trump’s populist policies could overwhelm the benefits of his pro-business agenda. “We are now in a period of time when how this balance tilts will be more important to the economy, markets, and our well-beings than normally dominant drivers such as central bank policies,” Dalio and co-Chief Investment Officer Bob Prince said in the fund's “Daily Observations” note to clients Tuesday.
Even the bulls must be concerned about the rising anxiety in equity markets. Widely called "the fear gauge,'' the CBOE Volatility Index is coming off its biggest one-day rise since Nov. 3, and a separate measure of bearish bets relative to bullish ones has surged to the highest since Trump’s election victory, according to Bloomberg News's Joseph Ciolli. This environment is a departure from the tranquility in equities during the weeks after the election, when the VIX fell to a 2 1/2-year low.
Although the stock market garners most of the headlines in the mainstream press, perhaps the best barometer of sentiment toward the Trump administration is the dollar. The Bloomberg Dollar Spot Index is down 2.6 percent this month, its worst performance since April. Traders are starting to wonder whether the economy will get as much of a boost from Trump's policies, meaning the Federal Reserve may not raise interest rates as fast as what's priced in to the market. Then there is concern that foreign governments could protest Trump's policies by looking for ways to diversify their foreign-exchange reserves away from the dollar. It doesn't help the dollar bulls that Trump is signaling that he wants a weaker greenback.
THE EURO'S TURN
It's becoming clear that any country running a trade surplus with the U.S. is at risk of drawing Trump's ire. His comments on the dollar came after Peter Navarro, head of the administration's National Trade Council, said in an interview with the Financial Times that the euro is “grossly undervalued.” Navarro also said that Germany’s advantageous trade position within the European Union was one of the main reasons for the demise of a U.S.-EU trade accord, known as the Trans-Atlantic Trade and Investment Partnership. The comments were seen as an implicit challenge to Chancellor Angela Merkel, who is presiding over the Group of 20 countries this year on a platform of free trade.
GOLD BUGS REJOICE
It's hard not to understand why assets and markets considered havens are back in demand. Just take a look at gold. The precious metal rose at one point today by the most since early September, and this month's 5.22 percent gain is the biggest since June. Gold is also getting a boost from the weaker dollar, as most commodities are traded in the currency. "It’s one thing to bring back jobs, but it’s another thing to cause protests and instability,” said Phil Streible, a senior market strategist at RJO Futures in Chicago. Silver, platinum and palladium are all up at least 10 percent this month.
All eyes will be on the Federal Reserve on Wednesday. While only one of the 94 economists surveyed by Bloomberg expect policy makers to raise interest rates and there will be no press conference with Chair Janet Yellen, that doesn't mean the meeting won't be interesting. Investors and economists will parse the Fed policy makers' statement for clues about whether they are still on track to boost rates three times this year, or whether some of the recent events in Washington put that in doubt. Bloomberg Intelligence Chief Economist Michael McDonough said in a report that the U.S. economy’s recent “encouraging” trend in growth will be enough to keep the Fed on a gradual tightening path, but probably at a slower pace than projected in December.
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