10 to 16 April: Butterflies

After battles with the courts and with Senate, it’s started to look like President Trump will struggle to generate any real change domestically. Last week suggests that the US President might switch his attention to geopolitics:

  • North Korea, after deploying an aircraft carrier to waters around the Korean peninsula, Donald Trump appeared to pressure China into action; “I explained to the President of China that a trade deal with the U.S. will be far better for them if they solve the North Korean problem!” Yesterday, whilst on a visit to the demilitarised zone, Vice President Pence stated that “the era of strategic patience is over.”
  • Afghanistan, the US exploded the previously unused, “Massive Ordnance Air Blast” device in eastern Nangarghar province – the biggest non-nuclear bomb in its inventory. This was in keeping with Trump’s promise to “bomb the shit out of ISIS”.
  • After Trump campaigned that “we should stay the hell out of Syria”, the US launched 59 Tomahawk missiles at a Syrian airbase two weeks ago. This was in retaliation to the use of chemical weapons on civilians, allegedly by the Assad regime. Last week the international relations fallout escalated. Russia vetoed a UN Security Council resolution to allow chemical weapons inspectors into Syria (the 8th time Russia has protected its ally at this council). This prompted Trump to claim US relations with Russia may be at “an all-time low” and that Nato is “no longer obsolete”.
  • The Dollar, Trump reiterated that the USD is “getting too strong”, but then went on to about-turn on his monetary policy view; during the campaign he claimed he was “ashamed” that Janet Yellen had held rates low creating a “false stock market”. Last week he stated “I like her, I respect her” and “I do like a low interest-rate policy, I must be honest with you.”

Markets responded to Trump’s new effort at exerting his influence with apprehension rather than panic. The VIX index (measuring implied variance) jumped to the highest level since November (north of 16%). However, realised volatility remained very low at around 5% for the week. Similarly, risk aversion prompted a rally in bonds, with the US 10-year yield at a 2.23% 5-month low, but the S&P 500 lost only 1.13%.

The first round of the French Presidential election is on Sunday.

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