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The Weekly Track total-eclipse

- The Weekly Track – Total Eclipse by Bob Savage
http://track.com/articles/the-weekly-track-total-eclipse/

The last total eclipse for the US was in July 11, 1991. Since then a lot has happened, including the end of the cold war, the unification of Germany, Gulf wars, 9/11, the rise of China as a global economic power, the advent of the EUR, the Great Recession and QE along with negative interest rate policy. The point being that between astrologic events, history can change but markets can remain in trend – particularly bonds. Until we get a better science for time, price still matters. The ability for the 30-year plus bond rally to hold despite politics might be the simple takeaway – as we tested close to the yearly lows in yield again last week – even with the odds of the FOMC hiking rates into December remaining near 45%.

The present malaise for markets in the US focuses on the inability of the US President to regain the media and the political agenda with his own GOP. The firing of his senior advisor Steve Bannon Friday was taken as a positive signal but unlikely sufficient to change the pushback of his Republican Party regarding Trump’s moral equivalency given to racists. The US political landscape can change but most see it clashing first as the most immediate need is to fund the government with the debt ceiling debate in September dominating fears. The ability for the Republican Congress to pass anything and drive forward some hope for 2018 re-election rests on finding something positive to support in the Trump Agenda – like tax reform or infrastructure. Until then, expect the tumultuous fears of the worst to dominate. The downdraft in US stocks, the USD and confidence are all connected but blaming politics alone maybe too simple – as we can learn from the eclipse, the daylight
can be blocked by the moon, so too can causation become too fixed on one factor. There are 5 drivers that also play a role – 1) Valuation. The US earnings in 2Q were good but the total market cap still exceeds the GDP and extends into bubble territory. 2) Growth. The markets are concerned about US 2% growth being the new normal and the risk of a recession as the recovery grows old. 3) FOMC Policy. The NY Fed Dudley speech Monday stands out as a risk that the FOMC hikes rates regardless of inflation and drives up the fear of a recession in 2019. The balance sheet normalization is also feared for its effect on credit. 4) Rest of World Growth/Policy mix. The rally up in risk in 2017 has been connected to the global coordinated recovery with Europe and Emerging Markets standing out. The EU recovery seems at risk from the EUR as the ECB highlighted in its Minutes last week. China surprised many with its 2Q GDP but the start of 3Q looks less robust and credit issues remain le
aving PBOC policy key. The EM recovery still seems vulnerable to reversals in cash flows as investors pause into Autumn with rate and growth uncertainty in the US adding to caution. 5) Geopolitics – whether its North Korea, Russia, Brexit or more terrorism in Europe leading to a more complicated German election than expected – all global events remain a risk to investors and feedback to US politics as leadership from the President has been the fallback for such events. The 2018 elections are still far away and the fear factors surrounding them now are likely to be completely different in the summer of 2018. So one has to wonder if the Monday astral event will actually shift into something positive rather than negative for investors as time remains on the side of markets and the US into the 2nd half of August.