Make market volatility great again? Analysts at JPMorgan Chase & Co. have created an index to gauge the impact of President Trump’s tweets on U.S. interest rates, which they say is on the rise.
The Volfefe index, named after Trump’s mysterious “covfefe” tweet, suggests that the president’s tweets are having a statistically significant impact on Treasury yields. The number of market-moving Trump tweets has ballooned in the past month, with those including words such as “China,” “billion,” “products,” “Democrats” and “great” most likely to affect prices, the analysts found.
“Trade and monetary policy have become an increasing focus for the executive branch, and everything from casual sentiments to seemingly formal policy intentions have been disseminated, globally and instantaneously, via this carefully scrutinized social media platform,” JPMorgan analysts led by Josh Younger and Munier Salem wrote. “In response, a broad swath of assets, from single-name stocks to macro products, have found their price dynamics increasingly beholden to a handful of tweets from the commander in chief.”
The president has averaged roughly 10 tweets a day since the start of 2016, with 10,000 tweets sent since his inauguration in 2017, according to JPMorgan’s analysis. Trump’s Twitter activity reached a low of five tweets per day heading into his inauguration, but has picked up substantially since late 2018 — with his highest number of tweets in the last four years occurring in recent months.
About 10% of the Trump’s tweets since his November 2016 election pertain to subjects of importance to U.S. markets, according to Citigroup quantitative foreign-exchange strategist Sukrita Chatterji. She added that in recent weeks they’ve become more centered on the dollar and the Federal Reserve.
The president’s tweets have included a direct Fed reference 20 times over the past month. That doesn’t include his Aug. 23 question of whether Chairman Jerome H. Powell was a bigger enemy than Chinese President Xi Jinping.
JPMorgan’s analysis looked at Treasury yields in the five minutes after a Trump tweet, and the index shows the rolling one-month probability that each missive is market-moving.
They found that the Volfefe index can account for a “measurable fraction” of moves in implied volatility, seen in interest rate derivatives known as swaptions. That’s particularly apparent at the shorter end of the curve, with two- and five-year rates affected more than 10-year securities.
Meanwhile, Citi’s work shows that the president’s tweets are generally followed by a stretch of higher volatility across global currency markets. And there’s little sign traders are growing numb to these messages.
“We find little evidence that the market achieves ‘fatigue’ on Trump tweeting,” Chatterji wrote. “If anything, the opposite has proven true with many of the largest market moves on Trump tweets having occurred recently.”
The ramifications of Trump’s tweeted market takes aren’t so definitive to be of use in the design of systemic strategies, Citi cautions. To the extent that there is a signal, it’s associated with U.S. dollar weakness relative to the Japanese yen and the euro when trade is the subject matter.
“With heavier tweeting on [the U.S. dollar] and the Fed likely to feature moving forward and these tweets seeing a bit larger and more consistent market moves, it would not be surprising to us if the market showed more, not less sensitivity to tweets over time,” Chatterji concluded.
JPMorgan and Citi aren’t alone in attempting to calculate the effect of the president’s Twitter activity on markets. Analysts at Bank of America Merrill Lynch published a note last week concluding that days in which Trump tweets relatively frequently tend to see negative returns of nine basis points on average. Days with fewer presidential tweets tend to see positive returns of five basis points on average.
Still, the S&P 500 is up more than 35% since Trump won the 2016 election.