In the week that we saw the anniversary of Donald Trump’s inauguration being “celebrated “, I use the word cautiously, by a government shutdown the first results of the structural changes to the US tax regime which he has introduced were seen. The talked about repatriation of $250 billion by Apple and the proposed new building and employment of 20,000 by the exact same company must be music to his ears. Whilst this was being discussed Napoleon Macron was offering a tapestry celebrating a “French”* defeat of the British 950 years ago as a token of goodwill whilst he was extracting £44bln from the UK. Here I think lies an interesting insight in the difference of the two power blocks of the US and Europe.
Of course Macron is not an appointed leader of Europe , except by himself, but this latter day little Napoleon is taking every opportunity to fill the vacuum left by Frau Merkel’s travails and appearing as the strong leader of a united Europe. I use the phrase little Napoleon in its British sense that of a jumped up person in authority and not as a compliment to Macron or indeed his attempt at a Napoleonic hairstyle – brushing over a bald pate is always a fashion faux pas. Personally I fail to see why refugees based in the La Belle France are the UK’s financial responsibility but I suspect I have been controversial enough in my last couple of columns to avoid entering into this discussion but it did appear to me to be a classic case of a grand gesture concealing a more important issue.
Unlike in The Wizard in The Wizard of Oz , this is not a deliberate diversionary tactic by Macron but a coincidence . Politically Europe is weak, again, and will remain so until the leadership of Germany is decided and Europe’s own internal struggles are resolved but the larger picture of how Europe is faring in the world is more interesting from a trading point of view. Apple’s proposed payment of $38Bln in taxes at home and its impact on the US has wider implications than first thought and they will be the first of many corporates to go home to daddy Trump. I have been trying to work through the implications firstly for the Dollar and secondly for treasuries. The number widely discussed is two Trillion Dollars which even by FX markets with daily volumes of around five Trillion is a grown up number and on its own would lead to Dollar strength but the more interesting markets will be treasuries and stocks.
As these funds are moved around the must surely be an impact on treasuries of all shapes and sizes , for example were the funds held in local bonds denominated in say Euros before repatriation? And will the movement cause local bonds to suffer whilst US Treasuries get bought. Whilst the longer end of the curve is flattened by this potential buying will the impact of the job creation that Trump believes will occur, be inflationary and force up short term rates, as well as the Stock Market? All of a sudden we have 2 year against 10 year yield curve flattening further and possibly inverting whilst at the same the Vix has been popping back up. As I wrote towards the back end of last year an inverted yield curve has foreshadowed the last seven recessions.
We have almost certainly already seen some of the impact of the tax cuts on the markets and the stock market remains buoyant partially because of this but it is not only Dollars which are flooding back to the US we are also seeing the same happen, albeit for different reasons, with some financial instruments moving back across the Atlantic. The move is not entirely Trump inspired although his hatred of red tape, some would say detail, does make for a more benign trading environment than Europe is bent on creating. The introduction of Mifid 2, the worst sequel since Home Alone 2, has made not only ICE relocate some 245 Oil contracts back to the US it has also made the regulator in London give dispensation in terms of breathing space to the LME and ICE and for 30 months. It is likely that more trading cross the Atlantic as banks and brokers seek to transact in more sensibly regulated environment and Brexit, which may excuse the UK from complying from some of the regulation will come too late to prevent these flows from London. As an ex professional participant in the markets it brings a wry smile to my face that Europe is more worried whether a forward Foreign exchange contact has a fixed end date and as such is a hedge, or not, than any pretence at oversight or regulation on the growing Crypto Currency markets.
So there we have it. Europe’s penchant for regulatory interference is starting to pinch whilst Macron and his cronies ignore Toto and celebrate the hollow victory of the first Bayeux Tapestry/ Euro cross America gets on with business and all the while the CryptoKids play out their unregulated games…
Richard Matthews, who began his career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5
This column is the opinion of the author and does not necessarily reflect the opinion of LiveSquawk.