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The Sunday Blotter - Climbing the wall of ridiculousness

With the NASDAQ making an all-time high on Friday, we all have to separate politics from financial markets, ex Korea

I must confess that my crystal ball never works as well when I am travelling in the United States. The answer to this is simple. I tend to immerse myself more in US political noise when I am visiting than I do when spending time in Europe or Asia. I wake up early, read a bit, generally about the ridiculousness that is President Trump’s America. I switch on the TV for some background noise that is more of the same. In my heart of hearts, I know it doesn’t matter to the performance of financial assets, but I know it does affect my mindset. I tend to agree with the vast majority of the views that are espoused. With the deficits, anti-globalization measures, the dismantling of diplomatic norms, I do believe that President Trump is doing structural damage to America’s standing in the world but with the NASDAQ making an all-time high on Friday, we all have to separate politics from financial markets. The facts tell you none of this matters. Or more specifically, politics is not relevant with economic activity this robust.

It is easy to say when the cycle turns, Washington dysfunction will matter. Or will it? Maybe it is just about the cycle. The President’s announcement of steel and aluminum tariffs this week was worrying but can be ring fenced. Of greater concern is the assumption that this is only just the beginning. Mr. Trump and his merry band of protectionist have started down a path that is designed to make global trade fair. In their eyes, this is only done via wide sweeping tariffs and levies against a myriad of industries. China and Germany are well and truly in the gun sights. While a 25% tariff against European auto makers would be a big negative for assets, as long as the data holds up, buyers will return. Tech outperformance to continue. Commodities stocks as a positive carry inflation hedge is the one sector struggling with trade concerns. Dispersion is back. Will passive flows peak? Let’s hope so.

I have made the point for the last several weeks that a hawkish Fed will eventually see global equities return back to the February lows. Friday’s employment data gives Chairman Powell the excuse to signal four rate hikes for the calendar year. While not on the radar screen as yet, a March 21st hike with more hawkish guidance creates the narrative that rates will become restrictive in 2019. This can take the steam out of equities, something that the uncertain outcome of tariffs cannot do. Anti-trade rhetoric is about sentiment. A more aggressive Fed has a direct line to growth and corporate profits. While the news flow over trade will provide equity markets with 2% - 4% declines, a hawkish Fed and dramatically flatter curve will lead to 5% plus sell offs and a much more negative narrative.

While many are cynical about the proposed summit between the leaders of the US and North Korea, there is little doubt that it has taken away a major headwind for North Asian assets. Owning Korean equities, at least for the next 3 months, is the most compelling trade I see globally. The risk premium for Korea assets will plummet and with tremendous valuation support, money that has been sidelined due to the risk of conflict will return. ​

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