After trying hitherto to ignore politics as much as possible many traders have now become the keenest of followers. Even algorithmic programmes are being written to respond to key words in political speeches, announcements, news reports and, of course, tweets. While there are important domestic developments around the world, global traders, both human and robotic, seem only to be focusing on four or five ‘wars’:
• Trade wars: affecting equities (notably in the US and China but also in most developed economies), Asian currencies (not just the the renminbi as a weapon and the yen as a haven) and Gold.
• Fed wars: US equities, US Treasuries and dollar-denominated bonds.
• ECB wars: the euro and euro-denominated bonds.
• Italian government wars: Italian equities, BTPs and (indirectly) other euro-denominated bonds.
• Brexit wars: sterling, UK-exposed European equities and (inversely to sterling) internationally-exposed UK equities.
Implicit in this new focus is the ignoring of most economic data and even, at least some of the time, individual company news (which overall has not been that great in Q2, especially sales). As a result, the end of August equities rally in advanced economies, including notably and inevitably the S&P 500, has been carrying on into September while painfully interrupting successive weeks of speculative bets on bonds, Gold and some Emerging Markets. The half-full glass explanation is that there is new hope that the worst can be avoided and the half-empty risposte is that the worst has merely been delayed.
The CNN Greed and Fear Index has edged back to Greed as the algos pick up positive political signals and the humans (including members of the American Association of Independent Investors) catch up. In contrast, institutional investors are continuing to reduce selectively their exposure to equities on the basis that not much has been either resolved or ameliorated. This is surely right and it is likely, therefore, that the Summer roller-coaster ride will continue into Autumn and beyond without getting very far.
