Trader's thoughts - The long and short of it

President’s Day

It’s Trump’s market – and we are all just trading in it. It’s perhaps for some – especially market-purists – the uncomfortable reality that, as far as short-term movements and sentiment goes, US President Trump and his policy making is the greatest determinant of the current macro-economic outlook. It cuts in both directions, and certainly the US President is just as prone to deflating the market as he is to inflate it. But almost by his own admission, Trump’s modus operandi is to implement policy and spout rhetoric that feeds the US equity market. For market bulls, there is the argument that this is a welcomed dynamic: we’ve seen the exercise of the Powell-put, and perhaps now traders are witnessing the execution of something resembling a Trump-put.

Where does Trump want the market?

The risk is that President Trump’s temperament and agenda can be difficult to gauge. He giveth to the market, and he taketh, depending on his personal, political priorities. For stages of his Presidency, Trump needn’t pay close attention to the US share market: he inherited improving economic conditions, then fuelled it with massive tax cuts, and stood back to observe the records falling in US stock indices. His hawkishness on international trade and bellicosity towards domestic political wrangling brought much of it undone, as the US President turned a cyclical slowdown in China into a possible trigger for recession in Asia and Europe. The global growth outlook is as downbeat as it has been in several years, and this has manifested in market-pricing.

Global growth and the trade war

Now of course, President Trump’s policy making isn’t the major – let alone only – dictating market activity and financial market strength. In terms of macroeconomics, the actions of the Fed have proven to be market participant’s primary concern. What makes the US President’s actions relevant to the here-and-now – at the critical juncture that markets are situated within presently – is with the US Federal Reserve succumbing to market pressure and flagging steady interest rates for the foreseeable future, trader attention is fixed on the global growth story. And it would seem that considering this, the primary driver of the global growth outlook is the US-China trade war: the outcome of which will be mostly determined by the stance US President Trump chooses to adopt towards the conflict.

Markets still jumping at headlines

The gap between the “knowns” regarding current economic conditions and the trade-war, and the “unknowns” regarding how the US President intends to approach these matters, is creating the vacuum of uncertainty that market participants are yearning to fill. As such, headlines are being jumped-at whenever news suggests there’s been a major development in negotiations between the US and China. Traders are less sensitive than they were to stories of trade-war progress, with every headline apparently yielding a diminished return. Nevertheless, if a significant enough story flashes across trader terminals, it apparently still warrants the release of risk-on sentiment. This phenomenon proved true again on Friday, as news that the US and China has agreed in principle on the main topics of trade negotiations moving forward.

Risk appetite piqued as fear falls

The prevailing view is that, at the very least, an extension of the March 1 trade-negotiation deadline will be implemented. Although arguably amounting to little more than a prolonging of tension and uncertainty, market activity is suggesting market participants are welcoming the modest change in circumstances. Despite looking long in the tooth, the US equity market rally continues, dragging stocks in Europe and Asia largely with it. Bond markets have been steady, however “growth” currencies like the AUD, NZD and CAD have received a boost, at the expense of the US Dollar and Yen. Commodities have generally rallied, while the VIX and High-Yield credit spreads have fallen to levels not seen since shortly after US Federal Reserve Chairperson Jerome Powell’s infamous “a long way from neutral” statement in early-October.

Where else but America

The general curiosity from here will be how long this broad-based confidence in the market can last. Even in the event that the best outcome can be achieved from US-China trade talks, it is contentious whether it will be enough to turn the tide for the global economy. China is slowing rapidly, and Europe is tiptoeing toward recession, with fewer policy levers to pull in the event economic activity deteriorates. The US economy for now is the beacon of the global economy, and ultimately one must assume that whether it be US stocks, US Treasuries, or the US Dollar, investors will remain attracted to “Made in America”. No economy in a globalized world can resist an international economic slowdown; until then though, market participants may well preference America first.

Australian markets to follow US

Australian stocks are on balance benefitting from the American-led recovery in financial markets. The ASX200, unlike its US counterparts, was unable to register a weekly gain last week. But according to the last traded price on SPI Futures, the AS200 ought to add 53 points this morning. The week for Australian markets should be interesting if nothing else: reporting season is underway, and the likes of BHP, Woolworths and Wesfarmers are reporting. The RBA release their policy minutes on Tuesday from their last meeting – an event that ought to be closely watched as rates traders gradually price in that the likeliest course of action for the RBA this year will be to cut interest rates, rather than to hike them or even keep them on hold.