REASONS TO BE CHEERFUL.

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The equity market continues its rally and the bond market sell off has stalled for the moment. Those are two reasons to be cheerful. The Trump Administration is putting a large store of credibility in their tax cuts ability to stimulate growth and a report on how badly the Obama Administration managed the economy. The author makes some rather spurious claims especially about wage increases and money coming back into the system.

For starters, the various investment bank researchers indicate that about 43% of the tax cuts will be paid out as dividends, some 205 in buybacks and about 11% in wages. The claim of 5 million people getting an instant pay rise a month or so ago could also be attributed to the 17 states that raised the minimum wage from $8 per hour to $11 per hour.

For someone on that low wage, that’s a reason to be cheerful because their wage just increased by a massive 30%. The claim that offshore money will come back in year one is a big claim especially as company’s have about 8 years to onshore their money and a portion of that money offshore is being used to fund operations elsewhere.

Equities rallied but with a note of caution. There are a few warning signs for the moment. The European economy whilst strong is slowing or rather appears to be peaking. German investment outlook has slowed whilst in places such as Canada, the Canadian also reflected the slowing growth in retail sales that the U.S. experienced over the last two months.

The issue, as always, is world growth and the U.S. are heavily dependent upon world growth for the moment. The NAFTA agreement appears to be under pressure and other trade agreements the U.S. has with other nations also appear to be strained.

For investors, the big concerns will be around the direction of rates and bond yields and just how high they will rise. The expectation is for another 3 rate hikes in 2018 and if that is the case then a 10 year around 3.20% or higher should not be unexpected.

If companies can continue to increase earnings and profitability, then the increase won’t be a major problem. However, should there be a slowing in revenues and profits then the equity markets could be in for a shock.

For bond investors the 7-year auction was well supported by China and Japan and other sovereigns. These investors took the largest share sine September. The interest in U.S. rates may have been spurred after the ECB minutes were released.

These minutes indicated that the policymakers believe it is premature to signal normalisation of rates as inflation remains weak and growth still appears to have the wobbles from time to time. The sweet spot for equity and bond rates according to Merrill is with rates around 1% to 3%. For Credit Suisse a 10 year bond rate of 3.5% is a cause for concern.

Recap.

 
Equities: The S&P 500 rose 0.1% The Dow rose 0.66%. The Stoxx fell 0.2%. At one point, the Dow was up 1.5% .

Currencies: The Bloomberg Dollar Spot Index rose 0.1%. while the euro fell 0.1%

Bonds: The ten-year rose to fell to close at 2.92%. The 2-year closed at 2.26% and the 30-year closed at 3.21%. The ten-year bund closed at 0.704% and the UK gilt closed at 1.544% and the OAT closed at 0.98%. The U.S. curve closed 2/10 at 66.5bp, 2/30 at 95bp and the 10/30, closed at 28.4 bp. The U.S. 5-year closed at 2.66.

Commodities: Gold rose 0.5% and WTI rose 2.2 %.

Bitcoin is trading around $10,060.99.

Aussie Market Today.

Equities in the U.S. were mixed with the market coming off towards the close. The Aussie equity market should open with a little strength however this could mean that the market will be choppy. Expect some selling as investors wind back positions.

Bonds had a steady day and I expect the Aussie bonds to be similar. Expect some drift on the day.

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