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The Weekly Track politics-as-usual

- The Weekly Track - Politics as Usual by Bob Savage
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Back room deals with cigar smoke and the smell of money meeting greed. The mood for markets and how they deal with politics as a key driver doesn’t get easier. The uncertainty of US trade policy balances against stronger US economic data all coated with ugly US politics. The last week brought a general de-risking after a long summer of relative calm. The arguments that emerging market pain won’t affect developed markets began to fray and the divergence of US outperformance holding for another 6 months also was cast into doubt. Buying the dip last week didn’t work and it will be key to watch to see if it fails again next week. Both bonds and stocks lost value last week highlighting the pain of positioning. On one hand, US trade policy towards China with the threat of ever more tariffs seems to be leading to a dramatic slowdown of growth there and in emerging markets in general. On the other hand, US politics are seen tempering Trump with the mid-term elections expect
ed to swing to the democrats and a Congress untied in opposition to his policies. Leaders in Beijing bank on this point while Washington seems convinced of the China pain leading to better terms. The reality is that both may not happen as expected and risk markets are two binary for the grey world in which we live. Politics as usual are raising dark clouds over markets that have been comfortable with central bankers leaving easy money inflating assets if not the real economy. The hope for a dovish turn of the FOMC as inflation seems contained lost ground with 2.9% y/y wage growth and the US CPI/PPI data in the week ahead maybe more important accordingly. The turn into next week will be in the clash of how the ECB and BOE describe their reaction function to emerging market pain and the US/ China trade war risks along with their own domestic issues. Most rational players want normalization to happen but not if kills the recovery there. The complication in the US and abroad
is in the role of politics adding to doubts about central bank independence and how populist politics threaten the credibility of all institutions globally. There is nothing usual in this shift and the surprises are still likely to come from politics rather than economics making traders a lot less comfortable and volatility something to expect in the weeks ahead. The biggest risk for next week is in the headlines we don’t expected – as we learned from the Japan Typhoon and Earthquake or the NY Times Trump senior aide editorial.

The focus next week will be on Europe given the ECB and BOE meetings and the list of things that matter to analysts is well understood. Fear will come out of anything not expected.