Do the markets care much about the US political situation?

Outlook:

In the US, Trump's racist comments last week severed the bi-partisan links that were being knitted together on immigration to form the basis of agreement on the new budget. As of today, a deal is not pos-sible and the Republicans are cobbling together an extension to Feb 16. See below.

We are guessing that the markets do not really care all that much. The dollar will not benefit specifically from either a continuing resolution or a full budget bill. We don't know to what extent uncertainty over the budget is priced into current dollar weakness. Analysts have stopped talking about incompetence in the White House and dysfunction in Congress as a dollar factor, but we don't buy it. The ongoing loss of confidence in the US political machine cannot be having zero ef-fect on reserve and fund managers.

It's a Good Thing that markets are, usually, so indifferent to political develop-ments. But remember that extreme political events (Grexit, Brexit, Spain non-bailout, French election) do affect markets. The current judgment of the market is that Trumpism is not extreme.

What is very much on fund managers' minds is the global recovery and what it means for things like corporate earnings, commodity prices and central bank be-havior. First up at bat is the Bank of Canada tomorrow, widely expected to go for a hike. Dollar/CAD rose yesterday in a premature "sell the fact" but if the BoC disappoints, that move can come back in force.

As for the UK, when we read the new Barnier guidelines in the FT last night, the first thought is that sterling is toast. The new terms are horrible and embody the very violation of sovereignty that the UK was seeking when it voted for Brexit in the first place. For the EU to demand the UK seek permission to form a new trade deal with any other country (to replace the EU) must be unacceptable, right?

Equally unacceptable is the EU requiring its citizens to be exempt from any new immigration measures that the UK might want to adopt years from now. Tying UK hands like this is mean-spirited and practically designed to create failure of a soft Brexit. Unless the provisions are wrongly reported or just a negotiating ploy, bad things are about to happen. If May goes along, she is a weak Chamberlain lackey. If she fights, the City will accelerate moving plans. This is why we don't follow the story too closely. You no sooner arrive at a sensible deduction than things change.

Bottom line, the current dollar firmness is a snare and a delusion. The market adores the euro and that position is not going to change, carrying others along with it regardless of data. The market also likes the commodity currencies and for the moment, the yen.

Tidbit: Congress has until Saturday noon to come up with a budget or the gov-ernment shuts down. The Dems insist the Dreamers have to be protected, the Plubs want increased military spending and the president wants a Wall.

Outrage over the Trump "shithole" comment is still the top story. Two senators and a cabinet officer denying he made the comment damage the party's reputa-tion when so many others confirm the original quote (and the ones that came be-fore) are accurate. Press reports have it that Trump was bragging about the com-ment on the phone to pals even before the story broke as something that would please his base. The White House then denied the specific language.

Efforts to spin the sentiment are not working. Of course it's people in awful cir-cumstances who apply to become immigrants. People who live where there is a decent economy and a functional government don't feel the need to emigrate. Nothing new here, just the poison-lacing of the racism. And that's not new, ei-ther. Everyone always knew Trump is a racist. He would never have asked for the birth certificate of a white guy. And racism is hardly new, either, the tragic baggage of a country with ideals and principles so often ignored and violated. During WW II, German and Italian immigrants were required to register and even then sometimes rounded up and jailed as potential collaborators. Putting Japanese citizens into concentration camps doesn't bear thinking about.

Here's the good thing: Trump's disapproval rating is the highest ever for a first year, 54.5%. And in the Nov elections, the Dems have a better chance than be-fore the racist comment, if they can only avoid shooting themselves in the foot.

The fivethiryeight.com collection of polls shows that in a generic election 47.8% would vote Dem, a full 10 points over those who would vote for Trump's party. The Dem lead is as low as 5 points in one poll but as much as 17% in another. And only 39.1% of voters approve of Trump, from 47.8% in January a year ago. All the polls are updated as of yesterday. Here's the problem: people know they should disapprove of Trump because he's jackass, a lazy and inept president and a racist. But they are alone in the voting booth.

 

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