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Political Risks to this Market

What’s in Today’s Report:

  • Political Risks to This Market

Futures are sharply lower (about 1%) as bad economic data is furthering worries about a slowdown in global growth.

Chinese Retail Sales (8.1% vs. (E) 9.0%) and Industrial Production (5.4% vs. (E) 5.9%) both badly missed estimates.

In Europe, the flash composite PMIs also missed expectations at 51.3 vs. (E) 52.5.

Geopolitically it was a quiet night although Chinese officials confirmed the reduction of auto tariffs to 15% from 40% (this was already pledged but it is good to see it will be enacted on Jan 1.).

Today it’s all about economic data.  The numbers from China and the EU this morning were not good and fears of a global economic slowdown are rising, and we need Retail Sales (E: 0.1%) and Industrial Production (E: 0.3%) to push back on that narrative, otherwise today could be another ugly day.

Will Politics Add to the Volatility?

What’s in Today’s Report:

  • Will Politics Add to the Volatility?
  • Why Natural Gas is Surging

Futures are slightly higher as more positive U.S./China commentary was offset by Brexit upheaval.

The outlook for U.S./China trade continued to improve as it was confirmed “high level” talks are occurring.  But, that positive was offset by Brexit turmoil as the British Brexit Minister resigned over the proposed deal.  The Brexit upheaval isn’t a material macro headwind, but it can be filed in the “things this market didn’t need right now” category and it’ll add to volatility.

Fed Chair Powell’s comments after the close were a non-event (he acknowledged some mild softening of economic momentum but didn’t hint at any shift in the policy outlook).

Today there is a lot of important economic data to watch (in order of importance):  Retail Sales (E: 0.5%), Empire State Manufacturing Index (E: 20.0), Philly Fed (E: 20.0) and Jobless Claims (E: 215K).  There are also multiple Fed speakers today including Quarles (10:00 a.m. ET), Powell (11:00 a.m. ET), Bostic (1:00 p.m. ET), Kashkari (3:00 p.m. ET) but I don’t expect any of them, including Powell, to reveal anything new.

Finally, I’ll be joining Liz Claman on Countdown to the Closing Bell on Fox Business today between 3:00 – 4:00 pm ET to discuss the outlook for this market.

What Makes Politics a Bearish Gamechanger

What’s in Today’s Report:

  • Political Update (What Makes This Drama a Bearish Gamechanger)
  • Oil Outlook Updated

Futures are little changed following a quiet night as the August flash PMIs provided no big surprises.

August flash PMIs largely met expectations as the Japanese manufacturing PMI rose to 52.5 vs. previous 52.3, while the EU Composite PMI was in line at 54.4 vs. (E) 54.5.

On trade, the WSJ said odds of the 200 billion additional Chinese tariffs happening are higher than the market thinks and those tariffs remain a real risk to this rally.  But, for now, the market is focused on the on going talks and as such the headline isn’t weighing too much on futures.

There are several notable economic reports today, most important of which is the August Flash Composite PMI (E: 55.6).  But, we also get readings from housing via the FHFA House Price Index (E: 0.4%) and New Home Sales (E: 649K).  Finally we also get weekly Jobless Claims (E: 215K).

From a trading standpoint today, any trade headlines (positive or negative) will likely move markets while BABA earnings will also be important.  Earnings have quietly been strong this week and if BABA numbers are solid, it could help tech rally and that should pull markets higher.

Go Here to read the detailed report.

Why the Debt Ceiling Deal Isn’t a Positive for Markets, September 7, 2017

Bottom Line: Fischer & Debt Ceiling Not Market Positives

The two big news items Wednesday were the resignation of Fed Vice Chair Fischer, and the agreement on a three-month debt ceiling extension/government funding deal.

Starting with the former, Fischer’s resignation makes the Fed very slightly more dovish (Fischer was a modest hawk) but really the future path of Fed interest rates depends a lot more on inflation data than it does Fed personnel.

From a market standpoint, the odds of a December rate hike appropriately declined slightly Tuesday. But again, Fischer’s departure isn’t a dovish gamechanger, and if inflation metrics move higher between now and December we’ll still get a rate hike. From a stock standpoint, other than the temporary pop yesterday, I don’t see this news as an influence.

Turning to Washington, as usual, politicians have kicked the can down the road. On a positive note, we won’t see a debt ceiling drama or shutdown drama in late-September.

On a negative note, we likely will see an even more intense budget battle into the year-end. This will be all the more contentious because now tax cuts will be thrown into the mix, assuming Republicans have a concrete plan by then.

From a market standpoint, this is a very short-term positive in so much as it removes the possibility of a crisis over the next few weeks.

However, it sets up an even bigger potential negative into the end of the year. Bottom line, the debt ceiling/government funding agreement is not an incremental positive for markets, and we don’t expect it to push stocks higher from here.

In sum, both of Wednesday’s headlines had no real impact on our overarching macro view. We remain cautiously positive on stocks, but continue to believe that tax cuts and earnings hold the key to performance for the remainder of 2017.

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Cutting Through the Political Noise: 4 Events That Could Actually Cause A Pullback, July 26, 2017

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The political noise and theatre has officially reached a new level, with Russia, pardons, impeachment and other such terms of significant connotation being bandied about in the media seemingly every day. And if we were just reading the media headlines, it would cause someone to go into serious risk-off mode in their portfolio, especially given the tenor of the major news outlets.

But as we and others have been saying all year long, the market has so far successfully insulated itself from all the political drama, as it doesn’t have anything to do with earnings or (as of yet) the economy.

We’ve been consistent in our coverage of the political landscape, and I feel that we’ve done a good job cutting through the distracting noise. Yet given the recent uptick in political fervor across the media (including financial media), I think it’s helpful to identify, clearly, what political events could actually cause a pullback in stocks.

Absent one of four events happening (as it stands right now), politics will remain a distraction, but not a bearish influence. To be clear, we do not think any of these events are likely at this time; however, we are watching for any hints they might become more probable and cause us to reduce risk and equity exposure.

Political Pullback Event #1: Trump Fires Mueller. There are rumors and speculation swirling that President Trump will fire Robert Mueller, the special counsel in charge of the Russian election tampering investigation. So far, he is not expected to fire him, but Trump is unpredictable. If Trump were to do it, that would cause a risk-off move in markets, as everyone would take it as a tacit admission of some guilt on Trump’s part (i.e. fire the investigator before he finds something). But even if Trump wanted to fire Mueller, he actually can’t. Only the acting Attorney General can fire Mueller.

But even if Trump wanted to fire Mueller, he actually can’t. Only the acting Attorney General can fire Mueller. So first, Trump would need to fire Attorney General Sessions, and then the deputy Attorney General (Rosenstein). Then he would keep firing people until he found someone in the Justice Department that would fire Mueller. If this sounds familiar, it should, because that is what Nixon did when he fired Watergate Special Counsel Archibald Cox.

Given that history (rightly or not) people and markets would take the firing as a de facto admission of guilt that the president did something wrong, even it it’s not true. To boot, Congress would likely reappoint Mueller to the same job immediately, resulting in a massive stand off between the executive and legislative branches of the federal government. Nothing here would be positive for stocks, and a “sell first, ask questions later” mood could sweep across the markets.

Political Pullback Event #2: Steel Tariffs. The idea that the Commerce Department could impose sweeping steel tariffs (likely aimed at China) is a potential negative for markets, because it could ignite a trade war, which would be bad for US and global economic growth. Whether steel tariffs would result in retaliation from China or other nations remains to be seen, but the fact is
that macro-economic risks would rise, and once again we’d have a “sell first” reaction from stocks.

Political Pullback Event #3: Government Shutdown. We’ve covered this consistently in the report, but the current budget for the operation of the government ends on Sept. 30. Now, the probability of a shutdown remains low because the Republicans control the government. So, they’d literally shut down the government as the majority party a year ahead of elections, a move so politically stupid that it’s almost inconceivable.

However, this is Washington, and right now the budget being advanced through the House contains $1.6 billion in funding for the Mexican border wall, and a lot of cuts to domestic program. So, we can expect united Democratic opposition and (importantly) some moderate Republicans (Collins, McCain) to potentially oppose the budget, which makes passage in the Senate uncertain.

Political Pullback Event #4: Debt Ceiling. Again, this is an event we’ve already touched on in previous issues, but we’re getting a lot closer to the mid-October deadline and there’s been no progress made. Like the government shutdown, political common sense implies this won’t be a problem given it’s politically disastrous for Republicans. Congress has until mid-October to extend the debt ceiling, or face another default drama.

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How Politics is Impacting the Market—Update, July 12, 2017

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Politics interjected itself into the markets Tuesday, this time via a release of emails from Donald Trump Jr. regarding his meeting with Russian surrogates. But that wasn’t the only news out of Washington yesterday, as Senate Majority Leader McConnell has cut short the August recess to work on healthcare.

While those two issues dominate the media, the really important Washington-related events (from a market standpoint) continue to be largely ignored. So, I wanted to take a moment and provide a another Political Update.

Issue 1: Russia

Potential Market Impact: Not very big unless something substantial changes.

As has been the case for months, this topic dominated the headlines and drowned out almost everything else in the markets Tuesday.

But, as has also been the case, from a market standpoint the whole Russia subject remains much more of a media issue than a markets issue. I don’t say that to minimize any opinion you might have on the matter, but the fact is that until there is irrefutable evidence that Trump (or Trump’s team via direction from Trump) acted explicitly to interfere with the election outcome or break some other law, impeachment or removal of Trump remains an extremely remote possibility. Again, that’s because impeachment is a political, not a judicial, process, and it’ll take a lot for Republicans to impeach a sitting Republican President (and the same goes for Democrats).

Going forward, this Russia issue clearly isn’t going away as the Trump Jr. emails, while not directly incriminating, aren’t exactly exonerating, either. For now, any “Russia” dips should be bought.

Issue 2: Healthcare Bill

Potential Market Impact: Positive if the Healthcare Bill Fails

Looking elsewhere in Washington, Senate Majority Leader McConnell cancelled much of the Senate’s summer holiday when he delayed the start of August recess until August 14, giving our good public servants just three weeks off, as opposed to the normal five or six. The ostensible reason for the removal of the recess is to work on the healthcare bill, which at this point appears all but dead.

From a market standpoint, healthcare is only really important due to it’s effect on tax cuts. In many ways, markets want healthcare to fail, and fail quickly, so that Republicans can focus solely on tax cuts. To boot, if healthcare fails, it’s almost a certainty that Republicans will exit 2017 with almost no legislative accomplishments, so the pressure will be on to cut corporate taxes in 2018… especially given it’s an election year.

The bottom line with healthcare is this: Passage of an Obamacare repeal/replace bill still looks slim, but that’s ok for markets as long is it doesn’t endanger tax cuts in 2018. At this point, the sooner Republicans move on taxes, the better, so don’t be surprised by a relief rally if the healthcare bill officially fails in the Senate.

Issues 3 & 4: Debt Ceiling Extension & Government Shut-down

Potential Market Impact: Very negative.

The media is so myopically focused on Trump and healthcare that it’s largely ignoring the actual important, Washington-related events in 2017, which are the debt ceiling and government shutdown.

The debt ceiling must be extended by early October while the current government spending bill ends on Oct. 1 (if another spending bill isn’t passed, the government shuts down).

Now, the probability of either event happening is slim, because Republicans control Congress and the White House, and that would be the quintessential shooting of oneself in the foot. However, that doesn’t mean we won’t walk right up to the line again and give everyone a scare.

Bottom line, Washington remains much more bluster than bite for markets, but we are getting close to events that could actually move markets. Regardless of the headlines and sensationalism, the key is to look past the noise and stay focused on that debt ceiling and government shutdown in late-September/early October. That’s really when Washington might (rightly) begin to weigh on stocks.

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Political Update: Stay Focused on Taxes, Not Impeachment

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Before getting into the market implications of the latest political headlines, I want to remind everyone that any political coverage I give in the Sevens Report is solely from the perspective of the markets, they don’t reflect my preference or lack of preference for any specific politician or party. My personal opinions are not important. What is important is giving you analysis that cuts through the steadily rising amount of sensationalist noise in the financial media (on both sides), and keeping you focused on what’s really moving markets.

That said, given the latest revelations on President Trump, I wanted to take a moment and push back on some of the sensationalism.

Specifically, I want to explain clearly that any talk of impeachment is not realistic in the near term. The reason is simple: Impeachment is a political process, not a legal process. The House of Representatives must start the impeachment process, and since it’s controlled by Republicans, short of having incredibly damning evidence against the president, that simply won’t happen.

In all likelihood, even if Robert Mueller’s commission finds that President Trump likely obstructed justice during the Russian investigation, the evidence would have to be unequivocally conclusive in order to cause the Republicans to impeach. That means we would have to have the equivalent of a video or audio tape of Trump telling someone to break the law.

Obstruction of justice, unlike perjury, is an opinion derived from conclusions; it’s not a hard and fast fact (i.e. you told the truth under oath, or you did not).

So, to be clear, impeachment of President Trump is very unlikely over the next 1.5 years, again because of political reasons, not legal ones (and to be fair to Republicans, Democrats wouldn’t impeach a president either without undeniable evidence).

Now, all this might change if the House changes hands in 2018, and frankly that’s more than possible. On average, the president’s party loses about 30 seats in the House in the first midterms, and the Republicans enjoy a 45 seat majority. So, if the average holds, it’ll be close. If the Democrats take control and this is still an issue, impeachment is a real risk… but that’s a problem for another day.

In the near term, the key is to stay focused on tax reform. Expectations are pretty low at this point, but the market does expect corporate tax cuts in 2018, and the ongoing Russia saga does continue to reduce the chances of that expectation being met.

The biggest risk to stocks continues to be if the market begins to factor in no tax reform in 2018. If that happens, it’ll be good for at least a mild pullback. Taxes, not Russia, remain the number one risk to this rally.

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UK General Elections — What the Outcome Could Mean for US Markets, June 8, 2017

The focus on this event is magnified because of Brexit, but the bottom line is that it’s unlikely to move global markets. Still, I wanted to provide a basic primer so no one is blindsided if there is election-inspired volatility.

Today’s election will be for the House of Commons. Polls and most betting sites have the Conservatives (the Tories) holding an outright majority over the second-largest party, Labour.

Positive If: Conservatives increase their majority. Magic number: 330 seats. If the Conservatives win more than 330 seats, their majority should expand and it will give the Conservatives a clear mandate on Brexit negotiations, and on economic and monetary policy. Since markets like continuity, this is likely the most positive outcome for stocks near term (although to be clear, I don’t expect a big Tory victory to cause a legit global rally).

Neutral If: Conservatives hold an outright majority. Magic number: 325 seats (technically they need about 322 seats, as most people expect five seats in Parliament to remain vacant as they will be won by Sinn Féin in Northern Ireland, and they don’t exactly like to participate in British rule). This would be a step backwards, and make negotiating Brexit and implementing post-Brexit policy more difficult (but it wouldn’t be a bearish game changer for UK stocks).

Negative If: The Conservatives can’t secure an outright majority. Magic number: <322. This outcome would lead to a very weak majority government from either the Conservatives or Labour, and it would not be positive near term as there would be no mandate for Brexit negotiations or the implementation of economic policy. In this outcome (which is a low probability), the pound would likely get hit hard, as would UK stocks, although I don’t expect that it would be a global headwind beyond the very short term.

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Two Markets Down, Three to Go?, May 18, 2017

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The most important trading across markets Wednesday was not in the stock market, it was in the bond market… and the signals sent there were not good. Both the absolute level of bond yields, and the shape of the yield curve, deteriorated materially… and this is a concern that should not be ignored.

First, the 10-year Treasury yield imploded, falling 11 basis points to close at 2.22%, the lowest in three weeks and now just above the 2017 low of 2.17%.

Second, and potentially more importantly, the 10’s—2’s Treasury yield curve also flattened materially, as the spread fell from 1.04% to 0.92%.

sevens report - trumponomics

This is especially important, because the 10’s—2’s yield spread has now retraced the entire post-election steepening, and the curve is more flat than it was pre-Trump presidency. That is a very bad sign for banks, and since banks must lead a market higher in a reflation expansion, that is a bad sign for the entire stock market.

The 10’s—2’s spread has more than retraced the entire post-election move, as has the US Dollar Index (two down).

The 10-year yield is threatening to fall to fresh lows for the year. Yet, the BKX (Bank Index) remains nearly 20% above the pre-election close, and the S&P 500 still trades almost 10% above its pre-election close.

So, are we now looking at a situation where we are two down, three to go?

This situation cannot exist in perpetuity, and the collapse in yields yesterday is a warning sign that should not be ignored.

It’s not definitive yet, and one bad day doesn’t break a trend, but the price action in the bond market is becoming outright worrisome. And, I must continue to stress (as I’ve been doing since mid-March) that the bond market is the leading indicator for stocks. If the 10-year yield breaks below 2.17%, that will add to that warning. At that point, I will consider becoming more defensive in our portfolios.

Again, for context, the entire 2017 stock market rally is based on a expectation of an economic reflationary expansion. But, that expansion likely can’t occur unless the pro-growth policies from Washington actually materialize, and that probability is decreasing daily.

So while stocks have held up, reflationary-sensitive as-sets have negatively reacted (banks, bonds and cyclicals). These sectors must lead a reflationary bull market, yet all of them are breaking down or are in danger of breaking down. If they go, then the broad market isn’t far behind.

Again, I’m not saying get materially defensive yet, as one bad day doesn’t invalidate the market’s resilience. But caution signs are growing on this market, and I do not want anyone blindsided.

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What Comey’s Firing Means for Markets, May 11, 2017

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Regardless of how the rest of the year turns out, I personally will always remember 2017 for the fact that I had to try and figure out the market implications of political events that I never thought I would have to worry about.

What Comey’s Firing Means for Markets.Case in point, Tuesday’s firing of FBI Director James Comey moved markets yesterday, and I wanted to cover what that means going forward (it’s a mild and potentially negative, but not a bearish game changer). Now, to be clear, the market is agnostic to the politics of this drama and as such so am I. Whether you or I think the firing was a coverup or justified, it matters not from a market standpoint, so as I always do with political coverage, I will strictly stick to market implications.

The reason Comey’s firing is a mild negative on markets is because it further undermines President Trump and the Republicans’ ability to pass their pro-growth agenda.

Case in point, just yesterday, we saw part of the fallout from the Comey firing as the Republicans were unable to pass a reversal of an Obama rule against methane gas capture on oil and natural gas wells (Republicans say the environmental regulation increases the cost to drill natural gas and oil wells).

Three Republicans; Graham, Collins and McCain, voted with the Democrats, and the repeal measure failed 49-51. Graham and Collins were always “no” votes on the rule, but McCain was expected to vote “yes”—so much so that Vice President Pence was in the Senate to cast the tie breaker. McCain didn’t say so explicitly, but his “no” vote is widely seen as a protest vote against Trump.

Bottom line, the controversy now surrounding Trump’s move to fire Comey is a political hot stove, and some Republicans are already distancing themselves from the President as they are already thinking about re-election. Point being, the path to passing meaningful tax reform or other pro-growth policies just got more difficult.

Now, the good news is that this isn’t a bearish game changer for markets in part because expectations for tax cuts in 2017 are already pretty low.

Still, there is risk here, because the market does still assume some corporate tax cuts/foreign profit repatriation in 2018. If Trump/Republicans lose enough political capital to put a corporate tax cut in 2018 in doubt, then that will be at least a modest negative on stocks.

More specifically, after June 2018 (at the latest), everything in Washington will stop as focus shifts to the mid-term elections. So, if the market begins to think there will be no corporate tax cuts and no foreign profit repatriation, then that will begin to weigh on stocks later in 2017/early in 2018.

Bottom line, unfortunately politics remains an important influence on markets in 2017. On balance, expectations have been tempered from a policy standpoint, but the “gap” between likely policy reality and policy expectations remains wide… and it got wider this week with the Comey controversy.

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