Ignorance Is Bliss: Markets Steady As Geopolitics, Global Trade Paint Grim Picture

Well, less is more and bad news is good news again.

Or at least that what it feels like out there. It’s kind of hard to catch the narrative today, probably because nothing makes much sense. Chinese trade data out overnight was less than inspiring to say the least. Citi is out calling it a “trade recession.”

We could dive into the numbers, but that would be boring, right? So just know that exports and imports missed consensus expectations. You can view the following handy charts to find out everything else you need to know:

(Charts: Citi)

But that didn’t stop Chinese equities from rallying 1% and thanks in part to a weaker yen (we’ve made it back to a 102 handle and are pushing hard for 103) Japanese stocks rose as investors look to be frontrunning more ETF purchases by an increasingly desperate BoJ.

Meanwhile, oil’s getting a bump from chatter about an “informal” OPEC meeting which means we’re about to start getting at least a half dozen tape bombs a day about production freezes.

Donald Trump outlined his economic plan this afternoon and as it turns out, fixing the economy actually “won’t be that hard.” Good to know.

On the geopolitical front, a suicide bomber blew himself up in a Pakistani hospital killing 70. In Syria things have gone to pieces again after al-Nusra decided to break up with al-Qaeda (breakups are tough) and rebrand itself Jabhat Fateh al-Sham. The name change and newfound autonomy has emboldened the group. They played a key role in breaking the siege on Aleppo, Syria’s second largest city. That of course prompted what one rebel commander described as “insane airstrikes of unprecedented ferociousness,” from the Assad regime and probably from Russian jets as well. The dangerous thing about this is that al-Nusra wasn’t covered under the ceasefire agreement brokered by Russia and the US earlier this year and now it looks like they’re going to align themselves with some of the group who were covered which in turn means no one will be covered and we’re back to square one.

If you think about everything said above, you’ll likely find yourself at a complete loss in terms of explaining how it is that markets continue to drift higher (we’re off fractionally in the US, but nearly everything was green in Europe and Asia). Have a look at this screengrab:

Now for one thing, that headline is kind of contradictory, but we’ll leave that aside. The part you should note is this: “FTSE at 14-month high.” This comes after the electorate voted to leave the European Union. It’s as if all anyone knows how to do is buy stocks. And bonds. Just buy it all. Before the central bankers do. Amusingly, central banks are now competing to buy the same assets. Here’s BofAML:

“We find that the BoE could potentially target 19 names of the iTraxx Main constituents on top of those that fall into the ECB’s CSPP scope. That would bring the total number of eligible names under the CSPP, or the BoE CBPS, to 79. Note that under the ECB CSPP there are 60 names that are eligible according to our latest CSPP list; and 16 names are eligible via both programs.”

So you’ve got 16 corporate issuers whose bonds are eligible to be bought by both the ECB and the BoE. It just gets more surreal by the day. Who needs investors when you’ve got friends like Draghi and Carney.

But let’s get back to geopolitics for a minute. Consider the following from Nick Colas, chief market strategist at Convergex, describing why the likes of Jeffrey Gundlach and Carl Icahn are expressing consternation about the market:

“1) They are worried over escalating geopolitical events like terrorism or other destabilizing catalysts. Every senior hedgie I have ever met has a solid pipeline into senior global policymakers past and present. And the only thing that would spook everyone from Soros to Gundlach is geopolitics.”

“2) They all think the world has drifted too far from what they believe is a sustainable economic or social model. Soros must feel that his globalist worldview is deeply under threat from Brexit and now (Donald) Trump. Of course he would be bearish if he saw the world moving in a direction he thought was retrograde and unhealthy. As for the bond guys, they have had it drummed into their heads since Volcker that Fed credibility is the be-all, end-all of analyzing monetary policy. Now that the Fed seems behind the curve, they are freaking out.”

This line is important: “the only thing that would spook everyone from Soros to Gundlach is geopolitics.”

Needless to say, we concur. That’s pretty much the Heisenberg raison d'être. It’s funny because we’ve been cast as permabears for years and the whole time, we were long. Massively long. No one believed us, but we were. And, as evidenced by our take on the US economy published over the weekend, we’re really not that bearish on the US economy.

But to be frank, the world is going to pieces from a geopolitical perspective. It really is. And central banks can’t fix that. It’s now only a question of whether asset markets decide to price in any kind of risk.

Spread the love

1 Comment

  • Piet

    August 9, 2016

    so i recon a corection big one is bound to come soon ///