Financial markets can endure many shocks and surprises, and as we know, various surprise indices have been devised to measure expectations vs. outcomes. Traders today can be divided into two camps, those who “trade the news” and those who think they are above the news and trading the news is for chumps.

Neither camp is right or rather both camps are right depending on what holding period timeframe they are using. If you have a position based on expectations of a specific news event and you are wrong, the price can jump over your stop and the loss can be catastrophic. But if you ignore the implications of the news, you don’t know what you are doing. It’s like taking off in your Cessna when the weatherman says a storm is coming because the weatherman is so often wrong.

Right now trade is the great unknown. Traders in most securities are willing to overlook the implications of the global trade crisis because the US and China will be talking and maybe the British can avoid losing all the trade advantages of EU membership. This is unbelievably short-sighted if not downright stupid.  We have a ton of evidence and it’s growing by the day that the global trade war is (1) horribly damaging, (2) not ending anytime soon, and (3) beyond the grasp of the single reckless instigator in Washington, the incompetent Trump. For example, the Bank of England forecasts a no-deal Brexit can cause the UK economy to contract by 9%. None percent! This is not chickenfeed.

In the US, the Atlanta Fed last week cut the Q3 GDP forecast from 2.1% the week before to 1.5% due to a drop in consumption and capital spending. That’s the sentiment aspect. The trade aspect is a drop in the contribution of exports to growth is worsening from 0.26% to -0.33%. At the same time, the New York Fed nowcast has 1.55%, so the Atlanta Fed is not nuts.


So, it’s all very fine for us to speculate about political influence on the Fed and to applaud Mr. Powell pointing out it’s not the Fed’s job to make policy on the basis of trade events that have not yet happened and over which it has no control, but growth likely sliding down to 1.5% (or more) is certainly in the Fed’s wheelhouse.

Bloomberg reports the bad news is just beginning. China’s minor stimulus last Friday (a cut in reserves that will boost liquidity) is nowhere big enough to make up for the loss of trade that will cut deeply into GDP.  One analyst said “We’re looking more like we’re heading towards the bear-case scenario” where 6% growth in China this year slows to 5.4% next year under a 25% U.S. tariff on all Chinese imports… More and more people are seeing this trade tension become a longer-term overhang rather than a short-term shock.”

Long-term overhang is exactly right. When that light dawns on both Beijing and Washington, then what? It’s likely too late to reverse. Even if a deal is made in October, as the optimistic hope and pray, it will be a hard slog to dig ourselves out the hole Trump has dug for us. Then we will have less confusion about the economics—bad stuff—and the outlook (improving). That, at least, is familiar territory. Before then, we must expect disruption and silly posturing that restores risk-off sentiment. The safe-haven dollar is not dead, just hiding under a rock. 



This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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