23 Jan TRADE, THE ELECTION, GDP AND INTEREST RATES
Will November’s election become a market event? A survey of Bank America/Merrill Lynch’s institutional accounts indicated the uncertainty about the upcoming election is a bigger risk than trade.
As noted many times the progressive Democratic mantra is not yet viewed as a serious threat to Wall Street, a view that is perhaps misguided according to Merrill’s survey. Historically extremist agendas are crushed in national elections pointing to Barry Goldwater in 1960, George McGovern in 1972 and Walter Mondale in 1984 as evidence.
Do the participants in this survey believe a change in sentiment will soon occur?
Speaking of a quickly changed sentiment, Tesla is now the second most valuable car company in the world. Wow! Three months ago, The Street thought Tesla was a restructuring candidate. Shares have since more than doubled, up about 128%.
Wow! This mania is not as severe as the mania that has occurred in the Treasury/sovereign debt market, a mania that I think almost eclipses the infamous Tulip Bulb frenzy, but is noteworthy in describing the massive influence of momentum/technology-based trading has upon the markets.
Speaking of which, I have commented many times about the inherent risk in the Treasury/sovereign debt and municipal bond markets. There is still $11 trillion of negative yielding debt, an environment viewed as statistically impossible occurring only 0.001% of the time. The repo crisis has been discussed in depth.
Next week fourth quarter GDP is announced. About two months ago the Atlanta Fed was estimating a fourth quarter growth rate of 0.3% because of trade concerns, the slowest pace for any quarter since 2015. Today the Atlanta Fed is forecasting a 1.8% rate with inventories being the largest detractor from growth (inventories have declined and have not been replenished).
Consensus is expecting a 2.1% growth rate.
In my view the biggest issue at hand are yields as the sovereign debt/Treasury market has still priced in sub 1% growth.
In many ways today is reminiscent of January/February 2018. If growth surprises on the upside, will Treasuries (and equities) respond in a similar manner as February 2018?
Unfortunately, only history will answer this question.
Last night the foreign markets were mixed. London was down 0.25%, Paris up 0.09% and Frankfurt down 0.29%. China was down 2.75%, Japan down 0.98% and Hang Sang down 1.52%.
The Dow should open flat on health fears. The 10-year is up 5/32 to yield 1.76%.