One of the interesting things about recent market turmoil is that for the most part, volatility has been confined to equities.
Most notably, FX vol. has remained subdued (ruble and lira woes notwithstanding) despite the fact that currencies are where you'd be inclined to think trade war concerns and tariff jitters would show up first. That seems to suggest that markets are more concerned about what the Trump administration's communications "strategy" might be telegraphing about the President's competency than they are about an existential threat to the future of global trade and commerce.
My buddy Kevin Muir (who writes the widely followed Macro Tourist daily letter), talked at length about subdued vol. outside of equities on Tuesday. Over the weekend, another strategist I spoke to (who works at one of the big banks) suggested that the disparity between equities vol. and relative calm in other assets is likely attributable to some investors paring equity exposure in response to what's being perceived as a ham-handed effort at protectionism on the part of Trump, Ross, Mnuchin, and Navarro.
It's not so much that the policies are likely to permanently impair global trade as much as it is that the way those policies are being rolled out seems to show that Trump doesn't know what he's doing. If that's the case, the outlook for U.S. stocks might not be as rosy as everyone probably assumed following the tax cuts, because after all, if Trump really is incompetent, well then critics of the late cycle fiscal stimulus he's piled atop an overheating economy may end up being correct to suggest we're barreling towards an iceberg.
One good example of what I'm talking about here is the following excerpt from a Barclays note out late last month that finds the bank positing a scenario where Trump inadvertently negates the entire fiscal tailwind from the tax cuts for S&P earnings with his protectionist lean (I've used this a couple of times recently, but it's worth excerpting again):
For simplicity we provide estimates based on a uniform 10% tariff on U.S. exports (by U.S. trade partners) and all U.S. imports (by U.S. in retaliation). The results can then be easily scaled for different tariff assumptions. Under these assumptions we find that trade tariffs will hurt the S&P 500 2018E EPS by ~11.0%. This compares with our estimate of a ~7.3% positive impact of fiscal stimulus from tax reform. Thus an all-out “trade war” could potentially offset the positive impact of fiscal stimulus from tax reform.
And see that's one example of what I mean (and what some other folks I've spoken to mean) when I suggest that the reason equity vol. is elevated while FX and rates vol. remains relatively subdued may well be related to people simply paring exposure to what they think is likely to suffer most in the event it turns out that Trump really is as moronic as he seems.
Well in light of all that, I wanted to point out a new chart from Barclays. This is from their latest quarterly global macro survey that represents the views of 400 clients. Asked last month to identify "the biggest risk to global equities in the next three months", clients overwhelmingly chose "U.S. fiscal and trade policies" versus last quarter when "geopolitical shock" was identified as the biggest risk (click for high rez):
Here's some color from Barclays that reinforces the points above:
Clients also think policies have moved in a direction that is less helpful for US risky assets over the past few months. A year ago when we asked clients about how they perceive the effect of the US public policy mix on markets, 70% thought US policies would boost US equity returns. Investors are now much less certain; only 48% think that US policies will boost equity returns.
There you go.
But the real punchline here is when you think about all of this in the context of Wednesday morning's Trump tweets. That survey was conducted from March 12-19, which explains why investors were so concerned about fiscal policy and trade policy. And while I imagine those same 400 clients are still concerned about trade and deficits, I'd be willing to bet that all the people who switched their answer to the "biggest risk" question from "geopolitical shocks" last quarter to "U.S. fiscal and trade policies" this quarter are now having a hard time deciding between the two.