The Daily Prophet: That Could Have Been Worse — a Lot Worse

Connecting the dots in global markets.

Bend, but don’t break. That pretty much sums up financial markets as investors weighed whether the Trump administration will be able to implement any pro-growth, business-friendly policies this year after last week’s health-care failure.

Yes, U.S. stocks and the dollar fell, and haven assets such as Treasuries and gold were in demand, but the moves weren’t anything like the worst-case scenarios laid out by strategists over the weekend. While that may speak to the fact that a new health-care system wouldn’t have the impact on markets that tax cuts, deregulation or infrastructure spending would, it also probably reflects the realization that the global economy is on pretty firm footing at the moment. Worldwide economic growth is seen at 3.2 percent this year, up from 3.1 percent in 2016, according a compilation of estimates by Bloomberg News, and U.S. corporate earnings are on the rise again.

Opinion is divided on whether the Trump administration can successfully pivot toward tax cuts. Strategists at Goldman Sachs are optimistic, saying tax legislation could now come slightly sooner than they expected. Economists at Nomura Securities, though, say the fact that the fiscal outlook is much worse now than in previous periods when the government undertook tax cuts will make coming to an agreement that much harder, especially since many Republican members of Congress spent much of the last six years fighting to lower federal deficits. Get ready for a wild ride.

The Bloomberg Dollar Spot Index has now fallen in eight of the past nine trading days, bringing its loss for the year to 4.12 percent. America’s currency has become a clear reflection of investors’ doubt about the Trump administration. In fact, the dollar has now given up about 80 percent of its post-election gains. Societe Generale strategists said in a research note today that about the only positive they can think of is that bullish dollar positions aren’t as big as they were just a few weeks ago, meaning any further disappointments may not weigh on the currency as much as those bets get unwound. Bets on a rising dollar are still the world’s most crowded trade, according to a Bank of America Corp. survey of more than 200 fund managers. What’s more, 32 percent of investors see the greenback as overvalued -- the highest since June 2006. 

Maybe the dollar’s outlook isn’t all that bleak, judging by today’s $26 billion auction of two-year notes by the Treasury Department. Results of the sale showed that indirect bidders, a class of investors that includes foreign central banks, bought 53.6 percent of the securities offered, the most since February 2016. That’s compared with a 41 percent average. The auction is the first of three this week of coupon-bearing securities by the government that will raise $88 billion in total. Treasuries have benefited from demand for haven-like assets since the Federal Reserve raised short-term interest rates on March 15. At 1.25 percent, the yield on the two-year note is down from 1.28 percent on March 14.

The iron ore market, which is seen as a proxy for health of China’s economy and -- by extension -- global growth, is in free-fall, and it’s hard to see a bottom. After surging in the opening weeks of 2017, the commodity has had an abrupt turnaround as a drop in Chinese steel hurts the profitability of mills and as investors weigh indications of abundant supplies. Even some miners have been cautious, with BHP Billiton Chief Financial Officer Peter Beaven saying this month that markets should brace for lower prices, according to Bloomberg News’s Ranjeetha Pakiam. The most-active futures contract lost as much as 6.8 percent to 541 yuan ($79) a ton on the Dalian Commodity Exchange before closing at 549.50 yuan. In Singapore, the SGX AsiaClear contract fell as low as $75.47 after peaking above $91 in February.

Think the goings-on in Washington these days are an example of political risk? That’s nothing compared with what’s happening in South Africa. The rand reversed gains of as much as 1 percent Monday to trade 3 percent lower against the dollar after President Jacob Zuma ordered Finance Minister Pravin Gordhan and his deputy, Mcebisi Jonas, to cancel meetings in London and the U.S. with investors and ratings companies. No reason for the order was given. Speculation that Gordhan is on the verge of being fired has swirled for months, as he clashed with Zuma over the management of state companies and the national tax agency. But those concerns were overshadowed by an emerging-market rally this year spurred by the dollar’s drop, according to Bloomberg News’s Dana El Baltaji and Neo Khanyile. “There are some conclusions now being drawn that there’s possibly an imminent cabinet reshuffle,” said Manisha Morar, an analyst at ETM Analytics in Johannesburg. It also raises "the possibility of a downgrade coming sooner than later.”

There may be a dearth of economic data out of the U.S. this week, but that doesn’t mean investors can let down their guard. The Federal Reserve calendar is very active this week with no less than 14 speeches by policy makers on tap, including one by Chair Janet Yellen on Tuesday. Despite some of the volatility in markets following the failed effort by Republicans on Friday to repeal and replace Obamacare, the tone of the speeches may lean toward sounding upbeat, according to FTN Financial Chief Economist Christopher Low. Calling for additional rate hikes while markets are in turmoil could start to sound a little tone-deaf, Low said in a note to clients today.

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