Trader's thoughts - The long and short of it

Around the globe, geopolitics dominates

Political spot fires have captured the attention of market participants. From Washington, to Hanoi, to Kashmir, to Caracas, to London: the ugly machinations of power have dominated the headlines. Only, despite fleeting action, the impact to market activity has seemingly been muted. A facile logic might suggest that it is because of the geopolitical uncertainty in the world that markets have traded so dull overnight. It would be too long a bow to draw, though: tremors can be seen in prices, but a global earthquake can’t be found. Not to diminish the events turning the world in the last 24-hours: they go well beyond the importance of markets. It’s simply just markets haven’t responded terribly much to them.

In Washington

The most salacious news that had traders’ interest excited last night took place in the halls of US Congress. No, not the testimony of US Fed Chair Jerome Powell – though his words are of far greater import to markets. It was instead the unfolding Michael Cohen testimony, at which the disgraced lawyer has cast a series of accusations and aspersions toward US President Donald Trump, on issues ranging from Russian ties, electoral fraud and hush payments. On the face of what’s been said, the revelations are potentially monumental. However, although demonstrating signs of nervousness in the lead up to the testimony, as it unfolded, financial markets have seemingly shrugged off the possible implications of that event.

In Hanoi

Is it a collective dismissal of Cohen’s testimony? It’s too hard call. One assumes that if there was a material chance that US President Trump could fact impeachment, traders would stand to attention. So far: they haven’t, so the roughest conclusion is that such an outcome is still considered unlikely. As the never-ending circus plays-out in Washington, US President Trump is of course half-the-world away in Vietnam, trying to employ his self-styled statesmanship to charm North Korean leader Kim Jong-Un. The end game is denuclearisation in the Korean Peninsula and the end of what is technically a multi-decade war. Again, despite all the pomp and ceremony, markets are behaving as though no breakthrough will happen in that matter this week, either.

In Kashmir and in Caracas

Political posturing, and financial markets’ eye rolling, aside, there is a firm gaze on what is happening in both Venezuela, and the Indian-Pakistan border. At risk of conflating two all too complex geopolitical issues, markets are apparently taking note of the escalating tensions in those geographies. The necessary moral caveat: the potential for human suffering in each conflict is the biggest issue by any measure. But for traders, the power-struggle in Caracas is being judged on its impact on oil markets, and the potential it could inflame tensions between the US, Russia and China; while the conflict in Kashmir is being monitored for the potential for an all-out war between two nuclear-armed nations.

Back in Washington; and in London

It’s a tinderbox out there, but until it catches alight, markets en masse don’t appear too fussed. The geopolitical concerns pertain primarily to the trade-war and Brexit – the perpetual bugbears. The trade-war narrative overnight centred on a statement by Robert Lighthizer that America is pursuing “significant structural changes” to China’s economy. It’s contestable what impact that statement had on markets. The Brexit narrative did manifest in markets, however: falling into lock step with the UK on the issue, the European Union stated its amenable to extending Brexit if necessary. The Cable leapt to 8-month highs, Gilt Yields rallied across the curve, and a much better than 50/50 chance is being priced in the BOE will hike rates this year.

Bonds fall; oil rallies

The market-friendly Brexit news looks as though it shared its benefits across national economies. German Bund yields climbed considerably, as did US Treasury yields. The yield on the US 10 Year note touched 2.70% – something of a relief rally. Global equities were more reticent, with the major European and North American indices trading generally in the red. Important to note: the selling in bond markets could perhaps also reflect fundamentally altered inflation expectations, over and above growth optimism. Oil prices leapt overnight after US inventory data showed a much larger than expected drawdown in reserves, leading to US 5 Year Breakevens hitting 1.87% – a level not registered since the middle of November last year.

Australia

While inevitably influenced by Wall Street’s limp-lead, and the political ructions evolving across the planet, SPI Futures are indicating an Australian share market that is marching to its own beat once more. On that contract: the ASX 200 ought to open roughly 9 points higher this morning, perhaps due to the jump in oil and a leg-up in iron ore prices. The day’s trade might find itself focused on the macro-outlook for the Australian economy, and the reactions in ACGBs, the AUD and pricing for RBA rate cuts: local Capex figures will be delivered at 11:30am this morning – and are taking on greater significance after yesterday’s Construction numbers greatly missed economist consensus forecasts.