Traders Sticking to Safer Bets as U.S. Political Events Confound

(Bloomberg) -- Flight-to-quality trades could dominate the final sessions of 2018, as the U.S. administration seems to have shifted investors’ focus from concerns about the Federal Reserve’s tightening cycle to bewilderment at the political response.

Another weak day Monday for U.S. stocks -- which are on course for their worst month since 2008 -- helped to buoy Treasuries, as well as haven currencies like the Japanese yen and Swiss franc. The dollar, meanwhile, is failing to act as a refuge. Growing political risks from America itself may add to headwinds for the world’s top reserve currency, which many have already predicted is headed for a rougher 2019.

The news emanating from Washington “does little to inspire confidence among risk-takers or the investor class,” according to First Empire Securities chief market strategist Chris Ahrens. While economic data remain solid, “the absence of disciplined process and erratic decision-making by the U.S. administration” are driving capital toward safe harbors, he wrote in a note to investors.

Traders aren’t short of market events to follow, as oddly inflammatory fire-fighting efforts by the administration provide some distraction from the continued debate over whether the Fed’s monetary tightening path is appropriate.

First there was the public pushback from senior administration officials -- but not from Donald Trump himself -- following news that the U.S. president had discussed firing Fed Chairman Jerome Powell. Then came Treasury Secretary Steven Mnuchin’s attempts to alleviate non-existent concerns about a liquidity crunch by talking to bank bosses and regulators. And in a tweet on Monday, Trump apparently derided the Fed chairman’s understanding of the market, and his golfing skills.

On top of that, none of these messages addressed the partial government shutdown, which some say could stretch into the new year as the president seeks border wall funding.

Defensive Trading

The benchmark 10-year Treasury yield fell three basis points Monday to 2.76 percent, almost a half-percentage point below its 2018 peak. Should it break below 2.75 percent, 2.50 percent would likely be the next key level, according to Ahrens. The dollar, meanwhile, was down against most of its Group-of-10 peers, while the yen was up 0.8 percent against the greenback.

For those traders still active as many major markets prepare to close for the Christmas holiday, defensive trading looks to be the path of least resistance.

To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Greg Chang

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