With Friends Like You

The Heisenberg Report
By Walt of The Heisenberg Report

Thursday was one of those days that left traders scrambling to keep track of every potential market moving headline.

Thursday was one of those days (and there have been a lot of them under this administration), that left traders scrambling to keep track of every potentially market moving headline.

Everyone already knew Trump was unlikely to extend tariff waivers but the official word still seemed to take folks off guard. The renewed protectionist push is a decidedly negative development that’s likely to impact NAFTA negotiations and also make it more difficult for Trump to marshal a unified front in his efforts to adopt a more aggressive approach towards Tehran.

European officials were out with myriad criticism of Trump (see second linked post above). Manfred Weber, leader of the Christian Democrats in the European Parliament had the following to say:

Then, later in the session, this:

Then a half hour later, this:

The Mexican peso was crushed as trade is all that matters. Weakest since February 2017:

USDMXN

 

Similarly tough day for the loonie which was also dented by a GDP miss:

USDCAD

 

Treasurys rallied some more amid the trade melee. 10Y yields lower by ~2bps. 5s30s and 2s10s flatter (latter flattest since 2007).

10Y

 

Obviously, U.S. equities suffered as trade tensions that everyone thought had abated are now back on the front burner with the flame turned up:

ES

 

The EIA data was bullish (crude -3,620k Bbl draw vs. est. +450k Bbl build), but WTI  couldn’t hold the gains. As a reminder, crude snapped a week-long losing streak on Wednesday.

Oil

 

In Spain, it looks like Rajoy is out and that, along with the drag from the tariff news, which hit late in the European session, tanked the IBEX:

IBEX2

 

More broadly, European stocks took a hit as soon as the headlines crossed. Here’s the move lower in the context of the past week (give or take):

Europe

 

Italy looks like it might be on the way to having a government after Five Star and League decided to make one more run at making it work, this time with a finance minister who isn’t named Paolo Savona but who is nevertheless a euro-skeptic.  Italian equities closed slightly lower on the day after rallying early (like the broader European market, they were hit by the tariff news and the Spanish drama). Remember how folks were less worried about the effect of Russian sanctions than they were about Italian populism? This is from a week ago:

RussiaItalyCDS

 

Fast forward to now and people are more worried about Italy than they are about Turkey:

CDSTirkIT

 

We’ll see if Italian assets get any lasting relief from today’s news (which hit just as Europe closed), but as Goldman notes, “the gap between Italian bank bonds and the rest of the Euro area has widened meaningfully, especially in the USD market”:

SpreadsBanks

 

The euro chopped around versus the dollar in a fruitless effort to reconcile all of the competing headlines with upbeat CPI data:

EURUSD

 

Oh, and this is interesting… today looks like it was the 28th day in a row of no flows in either direction for the iShares Core MSCI Emerging Markets ETF:

So was it all bad news on the international relations front? Well actually no. We’re getting along great with North Korea.

In a nutshell:

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