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“Take A Deep Breath”: Citi Cuts Through The Political Noise

Courtesy of ZeroHedge. View original post here.

With markets having gone from complacent to sheer panic in the span of a day, here is Citi’s FX strategist Todd Elmer, urging traders to take a deep breath with a note which “cuts through the political noise” and as one would expect, says that the “risk-off response across markets to overnight political news is exaggerated.”

Perhaps… although with tens if not hundreds of billions in coiled gamma positions just waiting to be trigerred should the VIX surge not that much more, today could end up being a very ugly day. 

Cutting through the political noise

I think the risk-off response across markets to overnight political news is exaggerated, so the risk is that strength in safe-haven currencies and underperformance from risky currencies may begin to reverse. 

The issue is that it is hardly new news that there is intense media and public scrutiny on potential Russian interference in the election, possible links with the Trump campaign and the more recent firing of FBI Director Comey. However, the issue remains that Republican legislators control the levers for any disciplinary action. This means that markets should be more attentive to the degree to which any further revelations undermine support for the administration in Congress, the rest is just noise. 

It can be debated whether the response from Republican leadership to overnight news has been more circumspect than has often been the case in the past. However, our assessment is that there has yet to be a more concrete, tradable signal. 

The more concrete signposts to look for will be:

  1. Any substantive acceleration in ongoing Congressional committee investigations which have been progressing only slowly. This would take the form of subpoenas for testimony or information, since legislators have in most cases shied away from using the most powerful tools at their disposal to prod the investigations along.
  2. The special house elections in Montana and Georgia. The Montana at large election is on the 25th of May and the second round vote for Georgia’s 6th district is on June 20.
  3. The appointment of a special prosecutor by the Justice Department.

Since the former will proceed only slowly and the latter looks somewhat less likely, I think the special House elections are potentially bigger market events. Since these events have rarely come up in client conversations with a range of investors, I think the market is probably underestimating the extent to which these could prove catalysts for volatility.

It is a relatively steep uphill slog for Democrats to take these seats, but even significant Republican underperformance vs. polls and previous performance is likely to be seen as a major marker that Congressional support for President Trump is slipping and the market would probably extrapolate some acceleration in this phenomenon ahead of the mid-term elections in 2018. 

Since the implication would be that this would further imperil the White House policy agenda and could introduce an additional layer of political uncertainty, this would be a stronger signal for outperformance from non-USD safe-havens.


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