Around 4 a.m. EST on Tuesday morning, I woke up on the couch (where I apparently fell asleep around three hours previous), reached for my iPhone (which was resting uncomfortably close to a still burning candle), and opened the G-mail app.
Although my mornings officially start with a cappuccino and a cigar (a combination which in November replaced pre-dawn vodka shots), they unofficially start with a review of around 400 Bloomberg e-mails. I scroll back to a few minutes before whenever I think I might have fallen asleep and scan the headlines all the way up until whatever time I happened to have woken up. That's a ritual I developed out of necessity long ago. The morning you skip the overnight headline review will invariably be the morning you miss something.
Sometimes you get to the end of the 400 or so mails and all you're left with is a bunch of seemingly disjointed headlines and bullet points. On those days, you have to pretend like you're the detective from The Usual Suspects. That is, you have to "step back and look at it" in order to construct an overnight narrative.
The funny thing is, Trump didn't say all that much. But what unnerved markets was that he didn't seem to understand that what he did say seemed at odds with the reflation narrative that traders have come to attribute almost entirely to his victory at the polls.
In short, Trump called the GOP border tax plan "too complicated" before saying the dollar was "too strong."
Algos jumped on the headlines, sending the broad dollar lower while the yen, already buoyed by risk-off sentiment tied to UK PM Theresa May's Brexit speech, fell below 113 for the first time since December 5.
All of this serves to underscore a point I made on Monday. Namely that we've reached an inflection point when it comes to the dollar, and more generally, when it comes to the reflation narrative.
While the market has taken dollar strength in stride thus far, any further move to the upside risks turning "good" USD strength (i.e. strength versus low-yielding, liquidity providing currencies) into "bad" USD strength (i.e. strength versus EM currencies). This is a point Morgan Stanley has been keen on driving home of late.
"Given the confluence of factors that look set to send the dollar sharply higher, it's probably not realistic to believe that we'll continue to see a dollar that's just strong enough to help developed markets escape the deflationary doldrums, but not strong enough to destabilize the emerging world," I warned.
YTD weakness notwithstanding, data on dollar positioning and the outlook for policy divergence between the Fed and other developed market central banks seem to suggest that long USD is still in play. As such, we needed to get some kind of meaningful mitigant to back up the contention that the reflation story has truly run its course. The market seems to believe that Trump's comments in the Journal constitute just such a mitigating factor.
Of course that's ironic, given that the reflation narrative revolves around Trump's plans for the economy.
Tuesday's action is also evidence of the fact that Trump seems to have virtually no conception of the extent to which his every utterance moves markets. Either that or he just doesn't care.
That's not an attempt to criticize him, it's just to say that given how he's pushed around individual names (e.g. Lockheed Martin (NYSE:LMT), Toyota (NYSE:TM), GM (NYSE:GM), etc.), it should have occurred to him that criticizing a Republican border tax plan that many on the sellside predicted would contribute to further dollar strength and explicitly saying that the dollar is "too strong" had the potential to send shockwaves through markets. It also should have occurred to Trump that his comments would be confusing. Here's one headline that hit around 2 a.m.:
- Trump's Strong Dollar Comment Puzzling Traders, Macquarie Says
"If his comments referred to the broad dollar, then this could be a 'game-changer,'" one analyst told Bloomberg.
And see that's the thing. I almost guarantee you Trump didn't mean to say anything that could be construed as a "game changer." He was, as I put it on Tuesday morning, just shooting from the hip. But in doing so, he unwittingly lent credence to the notion that the Trump trade (i.e. the reflation trade) is dead.
If you're in stocks, you should take a good hard look at this. That is, you should consider what this means for the S&P (NYSEARCA:SPY) in the context of the dollar's correlation with equities since the election. Here's Goldman (from a note out Monday):
Recently, the dollar is alone as a major risk-on currency, gauged by looking at the rolling correlation of S&P 500 and USD (Exhibit 1). This divergence is stark after equity/FX correlations had converged in late October. We view the strong USD and strong US equity market as coming largely from the same risk factor - growth and fiscal policy optimism following the Trump election.
Trump might have just killed the Trump trade, and as the graph above shows, that's likely to be bad news for stocks if the post-election trend holds.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.