Faith Fades, Bombs Fall

The confidence markets had in the new President and the Republican agenda is rattled. The Australian dollar was the top performer on the day while the Canadian dollar lagged. Japanese industrial production is next. Overnight's Aussie jobs figures exceeded expectations, forcing the Premium service to issue a hedging  AUD trade. Our indices trade joins metals deeper in the green.

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The quintuple flip-flop from Trump on Wednesday was followed by a fresh bomb in Thursday. This time, it was literally a bomb as US forced dropped a GBU-43/B Massive Ordnance Air Blast in Afghanistan near the Pakistani border. It's now the largest non-atomic bomb ever used in combat.

Markets wobbled a bit on the headlines but takeaways are tough. On the one hand, US officials wouldn't even say if Trump knew about it or authorized its use, so maybe it's nothing but a tactical attack on an enemy dug in deep.

A more sinister view would be that after last week's bombing in Syria, Trump is getting a taste for warfare. He wouldn't be the first leader who campaigned on less aggression and had his feelings change after getting power.

A less-sinister but more-troubling view for markets is that Trump doesn't stand for anything and that Congressional Republicans can't agree on anything. Markets have made a big bet on deregulation, infrastructure spending and tax cuts. Confidence is still high but it's waning and almost daily.

On Thursday, the S&P 500 fell 16 points to 2329 and is now just 7 points above the March low. In FX, the US dollar was strong and the general theme was an unwind of the moves on Wednesday.

We've highlighted bonds lately but 10s were flat on the day. Another spot we're watching closely is volatility. Several measures are disconnecting from markets in a way that could signal trouble ahead. The problem is that many such signals have been wrong in the past but volumes are increasingly large.

Markets are likely to quiet down in the day(s) ahead with Good Friday and Easter holidays. Asia-Pacific trading is mostly open on Friday and the US has decided to release retail sales and CPI into a thin market so that could be notable.

The next even to watch is Japanese industrial production at 0430 GMT. It's the final report and no revisions are expected from the +2.0% m/m prelim data.