EXPERTISE - NN Investment Partners

Super Thursday


(Photo: NNIP)

Markets have been calm and we have all discussed extensively what to think or how (not) to worry about this. For those looking for a bit more action there is always hope. Since history only rimes and is not reliable in repeating itself exactly, it might well be that new political or policy drama might be successful where Brexit or the US and the French elections have failed.

Maybe this Super Thursday will finally succeed in pushing market volatility sustainably higher and driving risk premia to the elevated levels that pessimistic investors and pundits feel they should be. Nothing super about this for investor returns if it were to happen, but the cocktail of an highly anticipated ECB meeting, an even more eagerly awaited testimony by former FBI chief Comey and an unexpectedly tight UK election certainly create the potential to intoxicate markets.

It might or it might not, but the key question is if it will last and do lasting damage to markets and the global economy. To see how likely this is, let’s run by these Super Thursday events. First and foremost, the regular ECB that takes place against the background of an ever-stronger European economy. Especially in the North of Europe this has strengthened the voices that argue for starting with unwinding previous easing measures that the ECB took in recent years. While contemplating this, a dark cloud floats on the ECB’s horizon of a European version of the infamous “taper tantrum” drama that erupted when the Fed started hinting at a removal of QE in May 2013. It created one of the biggest market corrections of the last 5 years, not something the ECB would be looking for to unleash at this point in time to put it mildly. Still, it drove down markets for a month or two, but it didn't trigger a real bear market as most losses were mostly recovered or previous highs even surpassed in the rest of that year.

Second, a damaging statement by Comey in his testimony to Congress on Thursday might further erode the credibility and effectiveness of US President Trump. However, there is currently little left in market pricing of the hope that Trump would boost markets with fiscal stimulus through tax reform and infrastructure spending. Also, it remains highly unlikely that indications of an effort to influence the direction of an FBI investigation by Trump will be enough to jeopardise his presidency. Only if a sizeable part of the Republican party would be willing to join forces with the Democratic party in Congress to initiate an impeachment procedure would the future of President Trump really be in danger. The political reality in Washington continues to suggest that Comey’s comments will be unlikely to achieve that, no matter how hard he might try.

It could still be enough to occupy markets for a while. A few days maybe or at most a week or two. But as long as Trump stays in power, the situation is relatively clear for markets: no more Trump support, focus on strong underlying fundamentals. In such a situation lasting damage to investor sentiment remains unlikely as the recent history of political shocks (Brexit, Trump election) has thought us all that underlying fundamentals matters more to markets than political drama.

This also says a lot about the possible impact of the UK election on global markets. It will basically be a sideshow. Really important for UK assets and probably especially the currency, but for the rest of the world it will mainly tilt the needle on the Brexit compass between the “hard” and the “soft” outcomes a bit. Probably not even in a very decisive manner as the political landscape in the UK might well become even more dispersed and confusing. Such an adjustment in expectations within a range of different types of Brexit scenarios is relatively marginal compared to the vast difference between the binary choice of remaining in the EU or separating from it. That choice has been made, the rest is no longer a dominant factor for global markets. It might add to some volatility on the day, but seems even unlikely to still be on market’s mind after the weekend.

So, Super Thursday does have the potential to shake things up, especially if the tail risks of all three events surprising negatively occur. The dominant force, in size, reach and durability, is probably the message coming from the ECB. Not so much its assessment of the risks surrounding growth and inflation, but hints of implications for the future of the QE program will be crucial. Different from the possible read through for markets from the Comey testimony and the UK election, a shift in thinking of the ECB QE program could well drive markets for a number of weeks, if not months. Given that the ECB is very aware of this risk and has acknowledged it publicly, it is not our base case expectations that a European tamper tantrum will be triggered.

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