The powers-that-be are concerned That Argentine voters have spurned Advice they’ve provided And rather decided It’s time some new lessons were learned And so, we cannot be surprised The media pundits advised Milei should step back And take a new tack Lest talking points get vaporized
It has been quite a slow session overnight. There has been precious little new in the way of data or commentary of note with respect to the current economic story. At the same time, the Thanksgiving holiday has trading desks thinly staffed and the Fed is noteworthy in its absence from the tape. As such, the news cycle has been filled with the OpenAI saga, something far outside the scope of this poet, the ongoing political infighting that is a constant thrum in the background, and one very interesting thing, the mainstream response to the election of Javier Milei as president of Argentina.
Given the dearth of other news, and the fact that I believe this has the opportunity to be quite impactful going forward, I thought I would take a little time and discuss this further.
According to Wikipedia, which in this case I have no reason to disbelieve, Milei, while new to politics, is a serious economist. He has earned two masters degrees in the subject, taught at university and is a widely published author on the subject. The point is, he has very clear ideas on how economies work from a theoretical perspective and having grown up in Argentina during one of its earlier hyperinflations, from a practical aspect as well.
What makes all this so fascinating is the deluge of articles that have been published in the WSJ, Bloomberg, CNN, the New York Times, et al. which are quite keen to highlight that his views are highly unorthodox and will fail dramatically, dragging the nation into an even deeper hole. In fact, I cannot find a single mainstream media source that believes his ideas will succeed. However, 56% of the voters in Argentina, who are actually living through the economic disaster of the mainstream views, thought differently.
Perhaps the clearest signal of this disagreement is that the Merval, Argentina’s main equity index, rose 7.1% yesterday on the news of his election. One need not be a conspiracy theorist to understand that if Milei is successful in righting the Argentine ship by throwing out the current orthodoxies, it will call into question everything that finance ministries throughout the G10 have been claiming and doing. As I wrote yesterday, I believe this election has the potential to signal a beginning of a significant change in the make-up of governments around the world. Do not be surprised when there is significant support for 3rd party candidates in the US; when AfD wins an outright majority in a state election or two in Germany; and if Mexico throws the ruling PRI out of office. As Neil Howe and William Strauss wrote in their tour de force, The Fourth Turning, this is the time when major upheavals occur. Be prepared for more volatility in financial markets as these changes make their way into the system. In other words, stay hedged!
Ok, back to the markets as they currently sit. Yesterday’s strong US equity performance found limited follow-through around the world. Asian indices were mostly slightly lower and European indices are mixed with the DAX (+0.2%) edging higher while the CAC (-0.25%) and FTSE 100 (-0.5%) are both under pressure. As to US futures this morning, at this hour (7:30), they are ever so slightly softer, -0.1%.
In the bond market, Treasury yields edged lower yesterday amid a relatively quiet session and are a further 1bp softer this morning. European sovereign yields are also a touch softer, somewhere between -2bps and -4bps, generally speaking, while JGB yields fell a further 5pbps overnight and are now down to 0.69%. This is certainly a far cry from the idea of tighter Japanese policy, although the yen continues to strengthen. Two noteworthy aspects in the Treasury market are that the 20yr auction yesterday went off without a hitch as the tail was actually negative (the highest yield was lower than the when-issued price) and dealers only took down 9.5% of the auction. This is a far cry from the terrible 30-year auction we saw last week. But the other thing that is not getting much press is the fact that the yield curve continues to reinvert with the 2yr-10yr spread back to -48bps this morning. Recall, this had fallen as low as -15bps and looked like it was about to normalize just a few weeks ago. Arguably, investors are telling us that the prognosis for future growth is declining although they are still uncertain as to when the Fed will begin cutting rates.
Oil prices, which have rallied for the past several sessions, are a touch softer this morning as the market has become confused to the key drivers. Does OPEC+ and its production matter more than economic activity? Are supplies tight or loose? I expect that we are going to continue to see uncertainty and volatile price action until something clearer shows up. As to the metals markets, gold and silver have both rallied this morning with gold creeping back toward that $2000/oz level, although not yet breaking through. But base metals are mixed with very minor movement. While equity investors remain convinced the soft landing is a given, the commodity space is far less certain.
Finally, the dollar remains under pressure as sliding Treasury yields weigh on the greenback. Once again JPY (+055%) is the leading gainer in the G10 and remarkably, CNY (+0.35%) is leading the way in the EMG space. What is quite interesting here is that the spot USDCNY rate in the market has fallen below the fixing rate for the first time since June. You may recall that the spot rate had been hovering at the 2% band limit for quite a while. This is another indication that the near-term outlook for the dollar remains lower.
On the data front, we get the Chicago Fed National Activity Index (exp 0.02) and Existing Home Sales (3.9M) this morning and then the FOMC Minutes at 2:00 this afternoon. You may recall that the Statement in the beginning of the month was seen as hawkish, but the press conference was seen as dovish and they talked about how financial conditions had tightened and helped the Fed along. But now, those conditions have eased again. Also, we have heard from so many Fed speakers in the interim, it is hard to believe that whatever they said three weeks ago is newsworthy.
So, with more eyes on the clock ,as folks want to get away for the holiday and are worried about travel conditions, than market conditions, I suspect today, and tomorrow and Friday, will be very quiet indeed.
Good luck
Adf
fxpoetry 