DID TRUMP LIGHT A FUSE? Markets react in an unexpected manner

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Markets reacted today in a manner that was somewhat unexpected. After the release of some earnings results that were unexpectedly lower than expectations (e.g.Walmart) the equity market sold. The Vixx rose some 20% the 3rd highest movement on record (remembering that the highest movement ever was recorded last week) adding fuel to the somewhat lit fire.

In essence, political turmoil is certainly a factor.  News of Cohn’s thinking to resign added fuel to the fire although this was softened by the statement that Cohn would tarry a little longer. What is does highlight though is that Trump is having difficulties working with key members of his cabinet and perhaps their values do not coincide with his reality. What it all does suggest though is that the market is now starting to waver and that there is now a strong belief that Trump will be a weak President that cannot get anything done. Trump’s agenda looks highly unlikely to become reality.

And in many ways the U.S. equity market’s expectations were too elevated given his rhetoric. Suggesting 3% growth does not happen because you promise something. It happens because you get a productivity rise, you get wages growth, you get a technology boost. Those are the ingredients this Administration fails to understand. The terrorist attack in Barcelona also added some concerns leading to risk off trades.

MOVING IN TANDEM S&P 500 AND DOW

To press the point on political turmoil, the ending of his CEO councils added fuel. Many of the CEOs bailed on Trump after his Charlottesville comments. Simply put, many companies have had for a many number of years tolerance and diversity as corporate culture. Trump’s speech alienated many CEOs and many of the CEOs received push back from their staff. So it would appear that Trump lit a fuse by tacitly supporting the white supremacists and neo-Nazi groups, and expectations have dimmed.

Bonds rallied on the uncertainty with the yield curve flattening a bp.

Recap:

Equities tumbled on political turmoil within the Trump Administration and weak earnings posted by Walmart, Cisco, Dow and others. The S&P posted 49 new 52-week highs and 10 new lows. It was the seventh day in which the NYSE has more stocks making a 52-week low than high. Turnover on the day was solid. The S&P lost 1.5%, the biggest decline since May and the Dow fell 1.2%. The Stoxx 600 dipped 0.6%.

Bonds rallied however there may be some near-term concerns. Growth in the eurozone is putting pressure on Draghi to ease back on QE and this could lead to some bonds being sold. The U.S. 10-year fell 4 bp to close at 2.18% and the 2-year rallied 3 bp to close at 1.3%. The probability of a rate hike by December is now at 29.6%. It is becoming very apparent that with sluggish growth rates and low inflation the Fed may be unable to hike rates a third time this year. Robert Kaplan said that he would need to see evidence of inflation at 2% to support a rate hike.

Commodities were mixed. WTI rose 0.5% on falling U.S. inventories and gold rose 0.4%. Lead gained today on the basis of an unforeseen boost coming from sanctions on North Korea. Palladium hit a 16 -year peak up 1.1% and a price of $923.8 an ounce. Silver and platinum fell. Copper and aluminium fell on profit taking.

Aussie Market Today

Today would appear to be a risk off day. I expect that bonds will rally and that equities will follow the lead from offshore and be sold.

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