(Bloomberg Opinion) -- Some 24 hours after he sent equities tumbling by using a United Nations address to bash China — accusing it of manipulating its currency and stealing intellectual property just days before planned high-level trade talks — President Donald Trump was at it again. Only this time, he made sure to say the words that would ease concern that all hope was lost when it came to striking a trade deal. In fact, Trump said, a deal could happen “sooner than you think.”
The S&P 500 Index promptly erased its losses to surge to its biggest gain in two weeks. But what about talk of impeachment? Investors know that is largely a sideshow better suited for discussion around the office water cooler. Even if the House were to impeach, it’s unlikely the Republican-controlled Senate would vote for removal. The real play, as seen in the move in equities, is betting that the politics in Washington pressure Trump to rapidly de-escalate the trade war by reaching some sort of agreement that he can claim as a victory. A strong stock market would be a powerful weapon for Trump as he attempts to fend off attacks from Democrats, and movement on the trade front would be just the thing to spark animal spirits. The latest monthly survey of global fund managers by Bank of America Merrill Lynch, released last week, showed just how important the trade issue is to markets. It found that the U.S.-China trade war topped the list of investor concerns, with 40% saying it was the biggest risk facing markets. “Markets are way more interested in a trade deal with China,” said Jamie Cox, managing partner for Harris Financial Group. “Now that the Congress is deadlocked into impeachment, the president can close a deal with China to boost the global economy into 2020, just in time for ballots to be cast.”
Although the S&P 500 Index is only a few points away from a record high, it’s up less than 4% since late January 2018 when the U.S. said it would impose tariffs on China. There’s definitely a lot of room for investor sentiment to improve. The State Street Global Markets monthly index released Wednesday showed investors remain less confident in the outlook for equities than even during the financial crisis. And its index covering the Americas is lower than those for Europe and Asia. Unlike survey-based gauges, this one is derived from actual trades and covers 15% of the world’s tradeable assets.
REPO RUCKUS
When the repo market started going a bit haywire last week, with the rate on overnight general collateral repurchase agreements jumping to 10%, the general sense was that the developments were relatively benign and could easily be fixed by the Federal Reserve stepping into the market, just as it had regularly before the financial crisis to provide whatever liquidity was needed. Well, the Fed did just that, but now it looks as if the central bank will have to stay in the market for a bit longer after doubling the maximum size of Thursday’s 14-day term repo operation to $60 billion and increasing the maximum size of the overnight repo operation for Thursday to $100 billion from $75 billion. The implication is that the longer the Fed needs to provide liquidity, the more it seems that the problems in this all-important market are more than just technical. Of course, this market is always skewed around the end of every quarter as banks scramble for cash, so we should know this time next week whether there’s some real problems.
A DOLLAR MYSTERY
The U.S. currency soared on Wednesday, with the Bloomberg Dollar Spot Index rising as much as 0.66% in its biggest gain since August 2018. The knee-jerk response is to say this a byproduct of a flight to safety as impeachment talk in the U.S heats up. The problem with that narrative is that it was a general “risk on” day in markets, with equities and credit markets strengthening and U.S. Treasuries and gold dropping along with other traditional “haven” currencies such as the yen and Swiss franc. So, what exactly is going on? One explanation is that the move in the greenback is somehow tied to what is happening in the repo market, reflecting the quarter-end dash for dollars. Another is that maybe traders are doubting whether the Fed will continue to lower interest rates. Chicago Fed President Charles Evans — one of the central bank’s more dovish policy makers — said Wednesday that he doesn’t see the need to cut rates again because two recent reductions should be enough to lift inflation above the central bank’s 2% target. “We’re pretty well positioned now to see how things play out from here,” Evans said. That should explain the big drop in Treasuries and gold.
GOLD TARNISHED
Gold fell more than 2%, its biggest slide in almost three weeks. Perhaps Trump’s comments on trade and China sparked the initial decline, but bullion’s decline really picked up steam after Evans’s remarks. The reason they hit gold so hard is because the precious metal pays no interest, making it less attractive relative to fixed-income assets in an environment where the Fed may be done easing. And if the Fed is done easing, there’s going to be a lot of disappointed traders who have piled into gold, pushing the tally of outstanding futures contracts to a record Tuesday, according to Bloomberg News’s Justina Vasquez. To be sure, the downside for gold is probably limited as the impeachment inquiry of Trump adds another layer of uncertainty to a long list of concerns that have boosted haven demand for bullion, according to George Gero, a managing director at RBC Wealth Management. Gold has been one of the better-performing financial assets in recent months, rising almost 17% since the end of May to more than $1,500 an ounce.
HELLO? IS ANYBODY THERE?
Mexico’s Finance Ministry apparently stood up investors and analysts who dialed into a routine call to get details on a $5.4 billion peso-denominated government bond sale. Rather than hearing from the officials, callers were left listening to music before the Finance Ministry sent an email two hours later to reschedule, according to Bloomberg News’s Justin Villamil. A ministry official said that the call failed for technical reasons and that everyone on its side was ready to discuss the bond deal. The episode might otherwise be a humorous footnote, but it’s a particularly sensitive time in Mexico’s bond market. The Central Bank of Mexico is famously hawkish, but the latest inflation data may force it to lower interest rates, Bloomberg News reports. Consumer prices rose an annual 2.99% in early September, the national statistics agency said Tuesday, the smallest increase in three years. That comes after the economy barely avoided sliding into recession in the second quarter.
TEA LEAVES
The recent string of strong reports on the U.S. housing market will end on Thursday with perhaps the most important one of all: pending home sales. Data over the past week on housing starts, existing home sales and new home sales have all exceeded economists’ forecasts by a wide margin. But they all reflect activity that has been in the works for months, as anyone who has bought or built a home can attest to the relatively lengthy process from beginning to end. But on Thursday, the National Association of Realtors will release its index of pending home sales for August. The median estimate of economist surveyed by Bloomberg is for an increase of 1%, which would follow a 2.5% drop in July that was the biggest since early 2018. In last month’s report, Lawrence Yun, NAR’s chief economist, said in a statement that “super-low mortgage rates have not yet consistently pulled buyers back into the market.” That’s troubling because mortgage rates were only marginally lower in August compared with July, and if they didn’t lure buyers in July, what’s to believe they did in August — a month when stocks tumbled and the University of Michigan’s consumer sentiment index plunged the most since 2012?
DON’T MISS
Why I’m Worried About the Repo Market: Narayana Kocherlakota
Impeachment May Be Just What the Stock Market Needs: Conor Sen
Are Draghi’s ECB Comrades Seeking Revenge?: Ferdinando Guigliano
A Dirty Word Is Driving Economic Change in Japan: Daniel Moss
Carbon Taxes Won’t Do Enough to Slow Global Warming: Noah Smith
To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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