Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis. Read more opinion SHARE THIS ARTICLE Share Tweet Post Email

Photographer: Stephanie Keith/Getty Images Photographer: Stephanie Keith/Getty Images

This is not the way olive branches are supposed to work. With signs that the recent frosty relationship between U.S. and China trade negotiators was beginning to thaw, investors expected that President Donald Trump might use his United Nations address to strike a conciliatory tone. Instead, he bashed China, accusing it of manipulating its currency and stealing intellectual property just days before planned high-level trade talks. Markets responded accordingly.

The Standard & Poor’s 500 Index fell the most in a month, while U.S. Treasuries rallied as investors sought haven assets. Stocks only briefly pared some of their losses and bonds barely budged even after Trump sought to quell rising impeachment talk by announcing he’ll release the transcript of a July phone call with Ukrainian President Volodymyr Zelenskiy after allegations he sought foreign help to smear a political rival, demonstrating how much weight markets put on trade talks. The latest monthly survey of global fund managers by Bank of America Merrill Lynch, released a week ago, found that the trade war topped the list of investor concerns, with 40% saying it was the biggest risk facing markets. And the rebound in equities the last few weeks came as U.S. and Chinese trade negotiators appeared to be making progress, paving the way for Chinese Vice Premier Liu to head to Washington next week. “Markets have been a little bit optimistic hoping the trade talks that were being planned for next month would be a step forward,” Chris Zaccarelli, the chief investment officer for Independent Advisor Alliance, told Bloomberg News.

Political Turmoil U.S. stocks fall the most in a month as trade, political concerns rise Source: Bloomberg

If this is all part of Trump’s “art of the deal,” then it’s being lost on markets. “It’s interesting to hear him lead off his speech in a way that’s antagonistic towards the Chinese,” Zaccarelli added. “The market saw it not as an olive branch but more of an assertive tone.”

BONDS ARE ON A ROUND TRIP

It wasn’t even two weeks ago when some pundits were saying the bond market had turned the corner and was headed for big losses after a rapid rise in 10-year Treasury yields from 1.43% on Sept. 3 to as high as 1.90% on Sept. 13. But as it often has over the last three decades or so, the bond market proved the naysayers wrong. The 10-year yield fell to as low as 1.64% on Tuesday. Besides the worries about trade, impeachment and general geopolitical risks, the bond market got a boost from a key report showing that the health of U.S. consumers may not be as strong as believed. The Conference Board’s index of consumer sentiment for September fell more than forecast, dropping to a three-month low of 125.1 from a downwardly revised 134.2 in August. The median forecast in a Bloomberg survey of economists called for a reading of 133. The gauge dropped as Americans’ expectations for the economy and the job market deteriorated, posing a risk to the household spending that is underpinning growth, according to Bloomberg News’s William Edwards. JPMorgan Chase & Co.’s widely followed weekly survey of bond traders released on Tuesday suggests the rally will continue. Its sentiment jumped to 17, putting it back among the most bullish readings of the past five years.

Round Trip Treasury yields are reversing the bulk of their early September gains Source: Bloomberg

THE DOLLAR MISSES THE HAVEN RALLY

The greenback was a surprising loser Tuesday, failing to benefit from any haven flows. The Bloomberg Dollar Spot Index fell as much as 0.27% in its biggest drop since Sept. 4. Currency traders appear to focusing more on the implications of the Fed’s efforts to calm the repo markets. According to the currency strategists at Morgan Stanley, the recent ruckus in the repo market has a lot to do with the Fed shrinking its balance sheet assets too fast, trimming them from well above $4.4 trillion in 2018 to a recent $3.76 trillion. So now the Fed will need to expand its balance sheets assets by purchasing bonds, which has the effect of injecting more dollars into the financial system. The strategists figure that means the Fed will need to buy about $250 billion of bonds. Those extra dollars will likely push ICE’s U.S. Dollar Index — which is similar to the Bloomberg gauge — down to about 92 from about 98.6 currently.

Dollar Doldrums The dollar sees no haven demand as Fed prepares to expand balance sheet Source: Bloomberg

A NEW WAY TO SHORT BITCOIN

It wasn’t quite a “flash crash,” but Bitcoin took a sudden spill in afternoon trading. The cryptocurrency plunged as much as 12.5% in its biggest-day tumble since July 1. The decline comes after a 3.65% drop on Monday. Although it’s always hard to pinpoint why the cryptocurrency moves, it’s notable that the latest leg lower coincides with the introduction of a new way to short Bitcoin. Monday marked the debut of futures contracts offered by Intercontinental Exchange Inc. that can result in the actual physical delivery of the digital currency, according to Bloomberg News’s Matthew Leising. Of course, futures can also be used to bet on gains in Bitcoin, but their true value lies in hedging so-called long positions in the cryptocurrency. So those hedges will act as a natural weight on the price of Bitcoin. CME Group said earlier this month that it would increase the number of contracts users can hold in the spot month and said last week that it would begin options on its Bitcoin futures contracts in the first quarter next year, pending regulatory review.

Taking a Dive Bitcoin tumbles as new futures contracts begin trading Source: Bloomberg

EGYPTIAN STOCKS CRATER

Also during his visit to the UN this week, Trump took the opportunity to back his Egyptian counterpart, Abdel-Fattah El-Sisi, calling him a “highly respected leader” who “brought order.” And about those protests that have cropped up in Egypt? Trump dismissed them as small protests, saying “everybody has demonstrations.” Investors are clearly concerned about the demonstrations that have their roots in economic frustrations. The main stock index in Cairo lost about 11% in three days after anti-government demonstrations that started Friday. Even though the rallies didn’t last past Sunday or expand beyond several hundred participants, share-sale orders are piling up — mostly from foreigners, in a market that until the end of last week was among the top four performers globally, in dollar terms, according to Bloomberg News’s Filipe Pacheco. The gauge has posted its longest losing streak since 2015, and if it drops every session this week, the consecutive decline will be the worst since 2011, the year former President Hosni Mubarak was ousted. That’s surprising for a market that has lured overweight calls from abroad amid attractive valuations, macroeconomic reforms, a stable currency and declining interest rates, according to Pacheco.

Having An Effect Small protests in Egypt are pulling down the nation's key equities benchmark Source: Bloomberg

TEA LEAVES

There’s an active debate over what the recent gyrations in the repo markets truly mean. Some say there’s no cause for concern and that the spike in rates is due in large part to easily solvable technical factors. Others say it’s much more concerning and is actually a sign that the all-important “plumbing” of the financial markets is awry. One person can settle the debate, and he will be speaking in a public forum on Wednesday for the first time since the repo market started going haywire more than a week ago. Simon Potter, who until earlier this year was the head of the markets group at the Federal Reserve Bank of New York, is scheduled to speak at event in New York put on by the Peterson Institute for International Economics. Although the topic is “pressures for U.S. currency intervention through an analytical look at the pros and cons of the Baldwin-Hawley bill,” there are sure to be questions about what is happening in the repo market. In a hint of what he might say, Bloomberg News reported on Friday that Potter told listeners during a conference call that Bank of America held for its clients that the recent moves by the Fed to calm the repo market may not have a lasting effect and that fresh debt purchases by the central may be needed to make sure that enough reserves are in the system to keep the repo market functioning smoothly. Potter became a nonresident senior fellow at the Peterson Institute last week.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.