Trump said that he now could disclose
Trade talks have reached “the final throes”
We soon will reveal
A fabulous deal
Designed to increase our trade flows

Imagine, for a moment, that you are the leader of the largest nation (by population) on earth and that you run the place with an iron grip. (Or at least you continue to imply to the outside world that is the case.) Imagine, also, that your only geopolitical rival, with far fewer people but far more money, has completely changed the ground rules regarding how business will be transacted going forward, totally upsetting intricately created supply chains that have been hugely profitable and beneficial to your country over the past two decades. And finally, imagine that for the past eighteen months, a series of unforeseen events (increasingly violent protests in a recalcitrant province, devastating epidemic of a virus decimating your nation’s protein supply, etc.) have combined with the rule changes to significantly slow your economy’s growth rate. (Remember, this growth rate is crucial to maintaining order in your nation.) What’s a despot leader to do?

It can be no real surprise that the US and China are moving closer to completing a phase one trade deal because the importance of completing said deal has grown on both sides of the table. We saw evidence of this earlier in the week when the Chinese changed their tune on IP theft; an issue they had previously maintained did not exist, but are now willing to codify as criminal. And with every lousy piece of Chinese data (last night Industrial Profits fell 9.9%, their largest decline since 2011 and further evidence of the slowing growth trajectory on the mainland) the pressure on President Xi increases to do something to arrest the decline. Meanwhile, though the US economy seems to be ticking along reasonably well (at least according to every Fed speaker and as evidenced by daily record high closings in the US equity markets) the other issues in Washington are pushing on President Trump to make a deal and score a big win politically.

With this as a backdrop, I expect that we will continue to hear positive comments regarding the trade deal from both sides and that prior to the December 15 imposition of new tariffs by the US, we will have something more concrete, including a timetable to sign the deal. And so, there is every reason to believe that risk appetite will continue to be whetted and that equity markets will continue to perform well through the rest of 2019 and arguably into the beginning of 2020.

It is easy to list all the concerns that exist for an investor as they are manifest everywhere. Consider: excess corporate leverage, a global manufacturing recession, anemic global growth, $14 trillion of negative yielding debt globally, and, of course, the still unresolved US-China trade issues and crumbling of seventy years of globalization infrastructure. And that doesn’t even touch on the non-financial, but still economic issues of wealth and income inequality and the growing number of protests around the world by those on the bottom rungs of the economic ladder (Chile, Colombia, Iraq, Iran, Sudan, Lebanon, and even Hong Kong and France’s gilets jaunes). And yet, risk appetite remains strong.

The point I am trying to make is that there is quite a dichotomy between financial market, specifically equity market, behavior and the economic and political situation around the world. The question I would ask is; how long can this dichotomy be maintained? Every bear’s fear is that there will be some minor catalyst that has an extremely outsized impact on risk pricing causing a significant decline. Bears constantly point to all those things mentioned above, and more, and are firm in their collective belief that the central bank community, which may be the only thing holding risk asset prices higher, is running out of ammunition. Certainly I agree with the latter point, they are running out of ammunition, but as Lord John Maynard Keynes was reputed to have said, “Markets can remain irrational far longer than you can remain solvent.”

As of right now, there is no evidence that any of the above mentioned issues are relevant to market pricing decisions. So what is relevant? Based on the almost complete lack of price movement in the FX market for the past several sessions, I would say nothing is relevant. Every day we walk in and the euro or the yen or the pound or the renminbi is within a few basis points of the previous day’s levels. Trading appetite has diminished and implied volatility continues to track to new lows almost daily. In fact, especially for those hedgers who are paying significantly to manage balance sheet risks, it almost seems like it is not worth the money to continue doing so. But I assure you that it is worth the cost. This is not the first time we have seen an extended period of market malaise in FX (2007-8 and 2014 come to mind) and in both those cases we saw a significant rebound in activity in the wake of a surprising catalyst (financial crisis, oil market crash). Do not be caught out when the current market attitude changes.

With that, rather long-winded, opening, a look at markets today shows that every G10 currency is within 15bps of yesterday’s closing levels. And those levels were similarly close to the previous day’s levels. There has been a distinct lack of data, and really very little commentary by central bank officials. Even in the emerging markets, activity generally remains muted. I will grant that the Chilean peso (-0.6%) has been a dog lately, but that is entirely related to the ongoing protests in that country and the fact that investors are exiting rapidly. But elsewhere, movement remains less than 0.3% except for in South Africa, where the rand has actually gained 0.5% as demand increases for their bond issuance today. In a world where a third of sovereign debt carries negative interest rates, 8% and 9% coupons are incredibly attractive!

On the data front, with Thanksgiving tomorrow, we see a ton of stuff today:

We should certainly learn if the growth trajectory in the US remains solid before the morning is over, and I expect that the dollar may respond accordingly, with strong data supporting the greenback and vice versa. But the thing is, given the holiday tomorrow, liquidity will be somewhat impaired, especially this afternoon. So if you still have things that you need to get done in November, I cannot stress strongly enough that executing early today is in your best interest.

Overall, the dollar continues to hold its own despite the risk-on attitude, but I have a feeling that is because we are seeing international investors buy dollars to buy US equities. At this point, there is no reason to believe that process will change, so I like the dollar to continue to edge higher over time.

Good luck and have a wonderful Thanksgiving holiday
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