Notes From Underground

The speed at which markets react to political and economic headlines in an ALGO-driven world can create volatility that preys upon key levels. Today was a classic example as the long revered 200-day moving average in the E-mini S&P futures was violated and momentum moved quickly to the sell side. The S&Ps closed below the frequently tested long-term moving average of 2589.76 on a CQG continuation chart of the e-minis. In the last 30 minutes of trading at the New York Stock Exchange, there was a report that the Trump White House was pushing for a NAFTA overhaul deal within two weeks. The Mexican peso staged a late rally for it had been unable to withstand the intense selloff of the U.S. equity market. Several of the regular haven investments experienced rallies (YEN, GOLD, SILVER), but the U.S. Treasuries closed virtually unchanged as economic data reflected fears about underlying price pressures since ISM manufacturing prices rose.

Europe was closed today for Easter Monday so we will see if Europe pushes equities lower as European investors continue moving to the sidelines since the DAX and EURO STOXX have been much weaker than the U.S. and other global stock markets. The European bond market was closed so the ECB is armed with a FRESH 30 billion euros to use in April as it keeps adding to its QE program.

There was a late interview on CNBC with Peter Navarro and while he was firm in his views on the global economic he language was neither caustic or strident. The TRUMP tweets about the stock markets have GONE DARK as it is tough to overcome the noise of a 3 percent drop in equity values. The stock markets may be in the mode of repricing risk premiums (a nice term for defining stock market corrections), but as strong as profit projections are, corporate America has to begin to account for rising interest rates as well as rising wages. The large amount of corporate and household debt tied to floating rates is going to be impacted by the ongoing rise in short-term rates.

In a Project Syndicate article titled, “The Real Engine of the Business Cycle,” Atif Mian and Amir Sufi discussed the notion that the rise in household debt tends to be one of the best predictors of the power of business cycles. Currently, the household debt/GDP level is 78.5%, high by historical standards but not nearly as elevated as in 2008. But with a great deal of the floating-rate debt tied to benchmarks such as LIBOR, the FED‘s efforts to forestall inflation due to labor market conditions will have an impact on household balance sheets. In 2008 the U.S. household debt/GDP ratio was 98%, while government debt/GDP was 67.7% (which today has grown to 105%). Overall, the government and household debt load has increased as the FED is in a tightening mode. Debt is the one variable that can turn Powell/Brainard tailwinds into headwinds. If real estate is location, location, location then finance is debt, debt, debt.

***Last week the FT published an article titled, “Lagarde Jumps into EU Debate With ‘Rainy Day Fund’ Plan.” The head of the IMF has no business entering into the domestic political debate of the EU. Lagarde’s previous post was French finance minister and as the article suggested, Lagarde is putting forth a plan that echoes French President Macron’s desire for a harmonized financial authority for the entire EU. This would have a financial insurance fund to support European banks when the next economic crisis arrives. Many northern EU countries are opposed to the Macron agenda for its funding will fall upon the more fiscally responsible states. The Dutch and others are pushing for the fiscally stressed nations to put their houses in order before the entire EU becomes the collateral agent.

The bottom line is that the IMF does not belong in the discussion for it is a wealthy entity with huge assets. It was Lagarde’s meddling in the Greek crisis that prevented the massive restructuring that would have alleviated some of the financial pain.A s the FT article noted about Lagarde’s use of her IMF position: “Her proposals complement the campaign by Emmanuel Macron, France’s president, for closer economic and monetary union, including a sizeable common EU budget. Ms. Lagarde herself, a former French finance minister, is thought to want to return to Europe in a big role, possibly as European Commission president, for which she would need Mr Macron’s support.”

The plot to make Germany and others the creditors of the whole EU project thickens. Now President Draghi, what about the ECB balance sheet and the synthetic eurobond?

Tags: algo trading, Christine Lagarde, DAX, EU, Euro Stoxx, household debt

This entry was posted on April 2, 2018 at 7:51 pm and is filed under Debt Market, Europe, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.