Markets were mulling familiar themes last week. Will a wider U.S. twin deficit change the rules for the dollar and treasuries and is elevated volatility here to stay in equities? Judging by last week, the answer would be: probably and yes. The contemplation over these stories, though, were interrupted by politics. Mr. Trump announced his intention to apply tariffs on steel and aluminium—25% and 10% respectively—and Mrs. May attempted to give clarity on the U.K. government’s Brexit position.* I was unimpressed with both. Before I have a dig at Mr. Trump, I ought to provide an example of someone who supports it. I have great respect for Stephen Jen, but his argument here is like endorsing the idea of a diet by advising someone to eat nothing but kale and carrots for a decade. The analysis of Mr. Trump’s tariffs requires a distinction between the principle and the concrete measures. I concede that China is bending the rules of global trade, but Mr. Trump is stretching the fabrics of macroeconomic policy if he starts imposing tariffs on industrial goods. He is presiding over an economy close to full employment, a low domestic savings rate, and a medium-sized twin deficit. To boot, he is about to let fly with unprecedented fiscal stimulus.
Read MoreIt’s been a while since I had a look at financial markets. But I am happy to report that the laws of the natural world, inhabited by investors, are undisturbed. Volatility across most asset classes remains pinned to the floor, equities have pushed on—with the annoying exception of the majority of the portfolio’s holdings—and short-term rates in the U.S. also have crept higher. In this environment, the DXY has regained its footing, although it still looks vulnerable relative to many of its G7 sisters, and the yield curve in the U.S. is still not sure whether to steepen or flatten. It seems to have settled in the middle; a small rise across the curve. Political risks have returned to Europe—did it ever go away?—but I am unimpressed with the bears’ attempt to kick up a fuss. In Germany, I am reasonably certain that a government is formed, eventually. In Spain, I think the Catalan separatists are on the road to nowhere. Their leader Carlos Puidgemont is caught between a rock and a hard place, and I think they will need to have regional elections to settle what precisely the mandate is. Finally, we are supposed to worry about Italy leaving the Eurozone. Break-up risks in the euro area, however, is the dog that never barks. The periphery wants to use the euro, not jettison it for their own.
Read MoreMarkets were focused on one of their favourite pass-times last week; fed watching. The FOMC underlined that it considers recent softness in core inflation to be transitory, and also defied uncertainty over two hurricanes which battered the U.S. earlier. Mrs. Yellen informed markets that the run-off of the Fed’s balance sheet will begin in October and that the Fed believes the economy is strong enough to warrant a continuation of the so far slow, but steady, hiking cycle. The peanut gallery saw this as a moderately hawkish statement, but this was because markets had been pricing out a December rate hike going into Wednesday’s meeting. Fed funds futures and front-end rates have since corrected to reflect a near certainty that the Federales will raise rates one more time this year, likely in December. In effect, though, the Fed merely confirmed the path that it set out 12-to-18 months ago. Last week’s signal to markets from the Fed led punters to re-evaluate a vexing question; does the market lead the Fed or the other way around? The vibe I am getting from the veterans on FinTwitter is that the Fed laid down the gauntlet, signalling that it intends to push on. If that is true, trades are there for the taking.
Read MoreThe portfolio finished August much in the same fashion as in the previous four months, stumbling to a monthly loss of about 0.7%. The dip extended the decline since May to a total of 1.1%—a far cry from the punchy +6.4% in the first four months of the year—and paltry compared with the MSCI World's +3.7% return in the same period. The numbers get even worse by adding currency effects. In a nutshell, your humble scribe has found himself on the wrong side of the contrarian trade of the year; the greenback's fall from grace. Accounts denominated in DKK and GBP with a lot of USD denominated investments have not been particularly friendly for returns so far in 2017. Speaking of which, traders' arguments about the dollar is reaching a crescendo and bucky has a decision to make. A few weeks ago I mused that if DXY broke 93 to the downside, punters would need to rethink their views. The DXY slipped to 92.5 towards the end of August, and I imagine many FX geeks are doing just that. The chart below shows that the dollar hasn't exactly crashed through support, so it still has time to step back from the brink, but it's getting sporty.
Read More