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Markets are reeling from a monetary triple whammy: repo tightness, a faltering of other forms of credit creation, and a record $900bn in reserves drainage
But all these sources of monetary tightness ought to ease
The question is whether this episode drives a more enduring reduction in risk appetite and fund flows
US repo rates have already spiked beyond year-end levels
The squeeze seems likely to continue – and intensify – while the US government shutdown does
The immediate consequences are $-positive and risk-negative – but mostly point to a deeper unwind of crowded hedge fund positions
In a narrow technical sense, the FOMC was indeed hawkish
But in the cessation of QT and through questions, it more broadly reconfirmed a reaction function at once deeply asymmetric and completely oblivious to asset price inflation
This paves the way for a further melt-up in risk assets and havens – and for more assets to exhibit the sort of exponential sawtooth boom-bust recently seen in gold
The recent “bond rout” would be better described as a long-end bond technical
It reflects dwindling pension demand more than existential fears around inflation or debt sustainability
Governments should reduce their long-end issuance accordingly
Investors should continue to hold steepeners until they do – without necessarily being short duration
The more Trump exerts personal control over US organs of state, the more the US’ real power is eroded
The main mystery is why this is still not being priced into markets
Part of the answer revolves around the amorality of capitalism, and prospects for more easy money
But much is attributable to the extreme and abrupt nature of credit repricings
Commentators argue increasingly that tariffs matter little, and for the return of US and tech exceptionalism
But this risks retro-fitting the explanation to the price action
An examination of the monetary data points to the exceptional way in which fiscal stimulus has been fuelling equities
Like tariffs, Section 899 continues the Trump administration’s declaration of economic war against erstwhile allies
As with tariffs, there remain considerable questions about the scale and scope of its eventual application
But the net effect should still be to cause foreign investors of all types to question their investments in America
Even before Trump’s EU tariff tweets, the risk rally had seemed unconvincing
This is in part because bond market developments are so concerning
But we think there are better ways to position than outright shorts in 30y govies
The bounceback in risk is unconvincing
This is in part because of overoptimism that tariffs and economic pain can be avoided
It is also because sentiment across markets has moved much more than actual positions
But ultimately it is because Hemingway’s famous quip applies as much to reserve currencies as to personal bankruptcy
The announced headline tariff rates are all over the place
But tariffs in general are more punitive than consensus expected, even after the inclusion of VAT
The immediate market response is being clouded by liquidity factors
