Markets Choppy As TACO Trade Cracks A Little

WHERE WE STAND – Having nibbled into the ‘TACO trade’ on Monday, the TACO showed signs of cracking a little yesterday. I think I’ll end the food gags there, before folk start to taco ‘bout how ropey my puns have started to become of late.

The trigger for yesterday’s shakiness? Seemingly, a renewed bout of relatively punchy rhetoric from China, who have begun a probe into the impacts of various US maritime curbs, while also sanctioning the US arms of South Korean shipping firms as part of the same investigation. Trump going on the waffle later on about soybeans and cooking oil didn’t help matter much either.

These actions, clearly, serving as another reminder to market participants that US-China tensions do indeed continue to simmer away, and do so in a manner rather more aggressive than participants would like, even as we continue to view last week’s 100% tariff threat as another example of President Trump’s ‘escalate to de-escalate’ strategy.

I still see that as the right way to view things, especially considering a WSJ story doing the rounds yesterday which noted that both sides have expressed their desire to quell the latest round of tensions, albeit for different reasons – the Chinese, to ensure the Trump-Xi meeting happens as planned later in the month; the Americans, in an attempt to ‘stem losses in the stock market’. At least that tells us that the ‘Trump Put’ is still alive and well, if nothing else.

Nevertheless, trade on Tuesday probably gave us a decent taste of how things may pan out over the next couple of weeks, with the market continuing to gyrate significantly on whatever the ‘headline du jour’ may be, with those simmering tensions continuing to cloud the outlook for the time being.

To put it bluntly, we all know that what we’re seeing is a negotiating ploy, we all know that this is the ‘Art of the Deal’, and we all know it’s probably going to end in a ‘TACO’ moment at some stage. But, nobody wants to be the one market participant that doesn’t hedge their book, either by increasing exposure to havens, or dialling down position size, just in case that it pans out differently this time, and one ends up with egg on their face.

Anyway, yesterday’s trade was defensive in nature, seeing stocks slide a little, while Treasuries firmed a touch across the curve, as gold printed a new ATH, and the dollar meandered within recent ranges. All of that, though, it must be said, panned out amid incredibly choppy conditions, again reflective of the higher realised vol that we can now expect to see as every man and his dog remains on tenterhooks awaiting the next trade or tariff headline.

As for my biases, I remain an equity bull, not only given the ‘TACO’ idea outlined above, but also as the rest of the bull case – solid economic growth, strong earnings growth, and a looser monetary backdrop – remain intact. Yesterday brought decent updates from the likes of JPMorgan and Goldman Sachs, as Q3 earnings season kicked-off, while Chair Powell did little to dispel the notion that the Fed will deliver 25bp cuts at each of the October and December meetings.

Meanwhile, I continue to favour further USD upside amid the Fed’s ‘run it hot’ approach, though that trade increasingly feels like it’s going to be a slow but steady grind higher, as opposed to an explosive move. Gold, on the other hand, has been an explosive move to the upside in recent sessions, though momentum clearly favours the bulls still from both a technical and fundamental perspective, with that upside wave being one that I remain happy to ride for the time being.

LOOK AHEAD – Today was supposed to be all about the September US CPI report, but that’s been delayed until next Friday, given the ongoing government shutdown.

Hence, there’s not that much, in terms of data at least, for participants to get their teeth into, with neither this morning’s eurozone industrial production figures, nor this afternoon’s US Empire State manufacturing data likely to be of especially much interest. The same, for that matter, goes for the Fed’s ‘Beige Book’, which will be released tonight.

As well as that, we’re due to hear from three FOMC members through the day, two serious and respected economists (Schmid & Waller), plus a puppet for the Trump Admin in the form of Governor Miran. A smattering of speakers from the ECB, BoE and RBA are also due.

Besides that, Q3 earnings season continues in earnest today, with Bank of America (BAC) and Morgan Stanley (MS) rounding out bank earnings before the open, and with United Airlines (UAL) due to report after the close. I wonder if the stock will take off, or crash land, after hours.