Reflecting on today's market action, Richard Breslow, a former FX trader and fund manager who writes for Bloomberg, notes the consequences just don't fit the crime. We need to be careful not to use up all of our hyperboles to describe how much global markets have reacted to the mess in Washington. We should save the best ones for when we really need them. Have prices moved on the news? Absolutely. It is the biggest story out there after all. But crashed, ripped, panicked? No. In fact, the muted reaction is as big a story as the moves themselves, such as they’ve been.

The other pitfall to avoid is the mistake of ascribing every move, in every global market, to this one story. The world is a complicated place and there’s a lot going on. German bunds didn’t rally hard and then fade because, in the middle of the Washington night, events went from feverish risk-off to considerably more sanguine.

 

Part of the market’s less than spectacular response can be ascribed to the low asset-price volatility that has caused so much consternation for months. We’re at potential inflection points for all sorts of economic policies and forecasts for regional and global growth.

 

 

 

Investors just don’t know where they want to put new exposure. It’s well and good to talk about mountains of cash ready to be put to work. But you have to come back with a convincing answer to the question “where?”

 

The other problem for traders as we’ve seen in the recent past, including after the November election, is what any of this really means for the markets. Much has been made of the dollar, defined broadly or narrowly, falling back to levels not seen since the immediate aftermath of the vote. Now, ask yourself, how many of you thought we’d have seen those trades to begin with?

 

 

The euro is unquestionably bid, with a nice technical support to justify trying to buy dips. No doubt there’s some safe haven impetus giving bulls comfort. But don’t ignore the fact that the European Commission, among many others, has been raising its growth targets, political risk is on the back burner and the ECB meets in three weeks when many think they’ll begin softening up the market for that never going-to-happen change in monetary policy.

 

 

 

Another reason for dollar weakness has been the absolutely remarkable performance of emerging markets. That’s a good thing. They rally in a world of rising interest rates when global growth and trade are viewed optimistically. Believe me, their story has more to do with Silk Road than potholes on Pennsylvania Avenue.

 

And lest you forget, that heavy overnight selloff in S&P 500 futures leaves them this morning well shy of even 1% off all-time highs. The threat to the proposed legislative agenda doesn’t by definition mean everything goes pear-shaped. Just ask the Mexicans. Stocks like deregulation, repatriations and buy-backs. Health care isn’t anywhere close on their priority list.

 

Don’t for a second think I’m not appalled by the shenanigans. The lack of dignity alone is enough to repulse. But to date, there remains a good reason that politics is in one section of the newspaper and markets in another.

As we noted yesterday, however, something has to give - there's only so much "crisis" that a 9 handle VIX can handle... As the chart below illustrates, the last 2 months have seen a surge in "crisis" stories lead to soaring stocks and collapsing risk perceptions.

The negative correlation between "crisis" stories and the market's perceptions of risk is unprecedented.

Does this make any sense?