Dear friends, investors and traders:

Markets started the week on the back foot, having just enjoyed a week when the ‘Trump trade’ was back on, now worrying on what Trump means for future uncertainty and this is the clue: More uncertainty. Yes, the mood has quickly changed. ‘Trump Shocks Markets’ What an unexpected headline!

We may only be 11 days into the first 100 days of Trump, but one thing is becoming more apparent, that markets are going to be continually tested by his words and actions  and  that only after 8 days, he has become the most unwanted president ever, looking at the famous gallup-polls in the US. Executive orders put in place over the weekend continued yesterday and overnight with the news that Trump has fired the acting US attorney general Sally Yates after she ordered the justice department not to enforce the President’s order. One of the most significant principals of democracy is the division of powers between the executive, the legislature and the judiciary!

If markets hate uncertainty, how do they deal with the absolute certainty that the uncertainty is going to continue, with the predictability of unpredictability? Of course the current market malaise might just be because it’s month end and everyone is feeling a bit overexcited about the whole Trump thing. Let’s see what happens when the dust settles. Well, that is a worrying thought, isn’t it?

It does feel like we are in for a period of reassessment on market prospects. I read more and more comments which are on the side of slower growth, and a return to low rates as the Trump rally backfires and triggers a new recession of uncertainty. 

And there are the increasing fears about Europe, Market weakness was not solely premised around Donald Trump, as in Europe we continue to see a political risk premium being priced in, as major equity indices fell by 1-2% and as both French and Italian government bond markets are widening vs. Bunds by 5-10bps. Spreads are likely to be choppy and, while in the credit market Italian risk has displayed some sensitivity towards political risk, it has not been so visible in French credits. 

CSPP or not (CSPP; the ECB started to buy corporate sector bonds on 8 June 2016. The ECB has purchased, on average, EUR 1.8bn of bonds per week (i.e. EUR 7.7bn per month. The ECB holds 814 bonds totaling EUR 58.8bn from 210 different issuers) that could change should OATs remain under continued pressure. Usually, any (tangible) domestic weakness does not creep in until two to four weeks before an election, so it seems a little premature for a repricing of French risk so early on and I’m confidently assured there is absolutely no risk Le Pen can get elected, no matter how bad the opposition will prove to be.

Meanwhile, the IMF has released a study which projects that Greece, at the rate at which it is going, will end up with a debt/GDP ratio of 275% by 2060 without a serious revision of its debt situation. It is now going on eight years since it became clear that Greece’s finances were built on lies and deception and righting the statistics did not change the the underlying economy. At 275% of GDP, debt servicing costs would chew up around 62% of GDP. Greece remains a fiscal disaster and sooner or later it will be back on the headlines.

Overnight, the BoJ kept policy on hold, maintaining the Policy Balance rate at -0.1% and the target for the 10yr JGB at “about 1.0%”, but raised its economic growth forecasts while leaving the inflation forecasts for the coming years unchanged. 

The status-quo outcome, combined with Lunar week holidays in Asia, resulted in a decline, following on from the fall in the US bourses overnight, with Nikkei hitting a 4-day low, as concerns over Trump’s move on immigration clampdown deepened after he fired the acting US attorney general for opposing his executive order on travel ban. The yen was stronger against the dollar on safe haven bids while US Treasuries extended their rally with 10yr yields lower overnight at 2.45% this morning before they corrected to the 2.49% area, while gold has risen above $1,200 an ounce. I am wishing all of my readers a continuous positive week ahead. 

Best regards,

Dominik Ciecierski