|Tuesday, November 15, 2016|
SPX Flat, Dollar Down, Crude Up
In the past week, the Trump Reflation Surge triggered the worst decline in bonds since 1981, cancelling out nearly $1 Trillion of value across the globe. The trajectory of the UST10Y regaining support at the weekly 50sma (1.782), and imbalancing upside to the 200sma (2.22) in a week is impressive. According to GS’s note, no matter the policy mix of a Trump’s administration, the outcome will be one of slowing economic growth, and the “Reflation Euphoria” will fizzle.
Overnight, the dollar index has hit 22hrs of resistance at the 100 handle, after a +320bps rally in the past four days—steepest since 2009. UST10Y yield stalls with resistance at 2.30, and support at 2.22. Meanwhile, the brunt of the pressure was focused on emerging growth currencies, bonds, and equities.
Besides global dollar shortage & Trump’s Fiscal Stimulus proposal. The dollar has seen demand due to rate hike probabilities >85.1% for Dec’16. Late last night the Richmond Fed President, Jeffrey Lacker, said that in light of the Trump victory ‘if a more stimulative fiscal stance would materialize that would bolster the case for raising rates’ and that ‘as a general matter, doing monetary policy with a more stimulative fiscal outlook usually warrants higher policy rates’. Prior to this the Dallas Fed President, Robert Kaplan (who is a voter next year), said that he had favoured a rate increase at either the September or November meeting and reiterated that he was hopeful that a hike is coming soon (via ZH).
We’re entering a new world of fiscal stimulus and saying goodbye to the days of Monetary Policy only era. Nevertheless, CITI,GS, & SOCOGEN chime in by saying “only source of equity upside has been debt funded buybacks”. So, what happens to debt issuance when rates rise? Opps…Nevertheless, BOFA clarifies the situation with “peak liquidity, peak inequality, peak globalization = peak returns for stocks and bonds in the coming years”. To make matters worse, the Fed is attempting to hike into a terminal declining of US Macro data. The recent inflation is not because of growth, but it’s the fear of massive fiscal stimulus.