Well, I guess we have to take President Trump both seriously AND literally.
The great Silicon Valley investor Peter Thiel — a Donald Trump supporter — is famous for stating that President Trump succeeded because his opponents missed his message when they took him literally but not seriously whereas his supporters did just the opposite.
Ever since President Trump’s election on November 8th, Wall Street has taken Mr. Thiel’s message to heart, ignoring most of President Trump’s controversial actions and tweets and focusing on the promise of strong economic growth. The Dow hit 20,000 as equity investors bid up stocks and the dollar remained near multiyear highs as currency traders bet on monetary-policy tightening.
The events of the last few days, however, are sending ripples of fear across the financial world. It’s not just the chaos at the airports, the constitutional challenges and the seemingly never-ending protests that worry investors. Of much greater concern is President Trump’s rift with Mexico and – almost as a drive-by victim — Canada. Together our North American neighbors are responsible for more than $1 trillion worth of trade, which President Trump has now put in jeopardy given his promise to dismantle NAFTA.
For U.S. multinationals, which make up the vast majority of the Dow Jones Industrials, the specter of protectionism is a major threat. So far, the geopolitical tensions remain more theater than crisis but they are clearly starting to weigh on the markets. The Trump Trade – which was based on the notion of quick deregulation, enhanced spending on infrastructure and the promise of much faster economic growth – is in danger of being turned into a Trump Fade. Protectionism, higher consumer costs and political tensions with allies and enemies alike threaten to cast a pall on any business investment going forward and to stop growth in its tracks.
Adding to recent woes is the fact U.S. economic data has been generally disappointing. Last Friday’s GDP report missed even the pared down estimates, printing below the key 2% mark at 1.9%. Wage growth and personal spending were also below forecast, indicating that, so far, the jump in consumer sentiment is not translating into greater economic activity.
|The dollar doesn’t seem like such a sure bet in the face of so much economic uncertainty.|
In the currency market, when traders want to make fun of uninformed clients who are chasing price, they like to use the term “yours” in a particularly derogatory manner, meaning, “Congrats, you just bought the top.” The U.S. economy is beginning to feel very much like a “yours” trade.
This week will be critical to the markets as traders assess both hard and soft data. On the economic front, we’ll get a look at both ISM indices, the ADP report and Non-Farm Payrolls. Expectations across the board are for mild increases. But only a much-better-than-expected beat — precisely the kind of data that Wall Street has been waiting for – would allay the growing worries that the Trump Trade is going off the tracks.
Yet the most important event of the week for the dollar is likely to be the FOMC meeting on Wednesday. This is a month where Ms. Yellen does not face the press, so the Fed will likely remain as inscrutable as ever.
But if the market perceives any dovish tilt in tone, then USD/JPY could quickly come in for a beating. The pair has not been able to retake the key 115.00 level for days and a failure to do so this week could point to a steeper correction toward the 110.00 figure. We’ll be watching every tick as suddenly the long dollar trade doesn’t seem like such a sure bet.