This has already been, and will continue to be, a week of significant events which, while not currently roiling markets, have the potential to change the mood and with it the degree of optimism fueling investing in those markets. Just today we had the sometimes tempestuous testimony of AG Jeff Sessions coming close on the heels of the same from (former) FBI Director James Comey, and in the shadow of chatter about terminating the special investigator and a pitched rhetorical battle over “travel bans” between the President and the courts. There is talk that the Senate Republicans are working behind closed doors on a health care reform plan, which is the closest to a sign there is that anything in the legislative realm is going to even be addressed before the Summer recess. A “week of infrastructure” was overshadowed by the drama, and did not yield anything of substance in any event. Treasury Sec. Mnuchin has indicated we will not hit our heads on the debt ceiling until early September, but “…markets don’t want us to wait.” The prospects for any market-moving, or perhaps even supporting, progress in 2017 are receding quickly.
Tomorrow (Wednesday) marks the FOMC rate “decision”, which could fuel positive equity sentiment either way it cuts. An increase signals a healthy enough economy for the Fed to continue on its expected path of rate increases, which should be bullish for equities. A decision to stand pat might also be well received simply because the market is still hooked on easy money. The prospect for bonds is not so happy – a rate increase while necessary and inevitable will impact longer bonds adversely, but vindicate strategists (WCM included) that have opted to stay at the short end of the curve waiting for Godot.
For as cloudy as the top-down picture has gotten in the US, the weather seems to be clearing over continental Europe. Macron and his party (en Marche) have been on a roll, showing strongly in the first of two rounds of legislative elections and pointing to the possibility they could control as much as 70% of the parliamentary body. France is now theirs to run and with such a definitive mandate progress from their pragmatic centrist position should be in hand – pro-Euro but also pro-reform for labor and other areas that have been holding France back from unlocking value. Germany certainly marches to its own drummer, but the beat across the industrial heart of Europe seems to be growing in consistency.
Which leaves us digesting the debacle in the UK. As we believed going back to the announcement in April, it was a brassy and arguably unnecessary move to call snap elections. PM May believed she had a mandate and she wanted to strengthen her hand going into Article 50 negotiations. The electorate has corrected that misconception. The election results were not purely a referendum on the path to Brexit, but it certainly loomed large over the polls. Even more significantly, austerity concerns around healthcare and other social programs seem to have tipped the balance toward Britain’s own Bernie – Jeremy Corbyn – and deprived May not only of her mandate but also her parliamentary majority. She now finds herself in a forced marriage to the extreme right Irish DUP to hold on to power, and at that there are signs, including from within her own party, that even a cobbled-together power base will not be sufficient to keep her in office for long. Although she is in the process of forming a new government now and situating her team to enter the Brexit negotiations, this could all come unraveled shortly and cast a great deal of uncertainty over a process for which the clock starts whether or not a single negotiation is undertaken.