Trumpeting Again.

Hardly a day passes by without Trump saying something that is somewhat controversial. Today was no different with Trump chastising the Federal Reserve and Jerome Powell for raising rates.

It would appear that protocols introduced by Bill Clinton to allow unpopular changes to be implemented without political repercussions have now been broken by Trump as he chastised the central bank. It would appear as any initiative by a Democrat is evil.  And Trump is doing his best to rectify that situation.

Trump’s complaint is that all the talk of raising rates is causing the dollar to strengthen.  This allows the Chinese with a weaker yuan to sell more easily into the U.S. despite the introduction of tariffs. What Trump forgets is that the dollar is not a home currency.  It is a global currency and as such trade flows, investment flows and many business flows require some movement of dollars, thus increasing its appeal.

Higher interest rates or even lower interest rates may not have the same effect in a textbook sense given the global flows in dollars. Anyway, it was an extraordinary comment. And the comment came in synch with comments relating to trade tariffs with China and also autos from Europe which is approximately a $400 bio trade flow.

Following Trump’s comments, the dollar reacted by swinging wildly between gains and losses whilst bonds rallied. What the comments may do is steel Powell’s resolve to tighten, even perhaps when a tightening is a 50:50 chance.

One factor that Trump overlooked in his comments relating to trade is the near collapse of borrowings by U.S. companies in the euro and sterling markets. Between 2014 to 2017 U.S. companies borrowed $500 bio in the what is dubbed the reverse Yankee market.

However, to date, this year only some $50 bio has been raised and the worry is that the trend is likely to fall faster. U.S. tax reforms are seen as the reason why the borrowers have left the euro and UK market. Because the tax is now applied over an 8-year period, there is less incentive to keep funds offshore and also taxes would be applied to profits accumulated offshore.

There is now no relief for borrowing and applying interest against income earnt offshore. The other issue is that the cost of borrowing has also risen, thus meaning that dollars stay in the U.S.

Commodities remain mixed and caution is returning to the market. The Bloomberg Commodity Index is now down 10% since May on mounting concerns that a trade war will derail global growth and affect commodities. We have already seen some effects with aluminium producers confirming weaker sales forecasts and some U.S. manufacturers complaining about higher input prices. Copper has seen the bullish bets pulled in favour of bearish bets with the metal falling some 9% this month. In fact, most metals have been sold over the month.

Recap. 

Equities: The S&P fell 0.4%. The Dow fell 0.54%. The Stoxx 600 fell 0.2%.

Currencies: The Bloomberg Dollar Index rose 0.3%  while the euro was unchanged.

Bonds: The ten-year closed around at 2.838. The 2-year closed at 2.591% and the 30-year closed at 2.958%. The ten-year bund closed at 0.271% and the UK gilt closed at 1.188% and the OAT closed at 0.565%.

The U.S. curve closed the day with the following closes 2/10 at 24.3 bp, 2/30 at 36.3 bp and the 10/30 closed at 11.8 bp. The U.S. 5-year closed at 2.734%.

Commodities: WTI rose 0.9%. Gold fell 0.4%.

Bitcoin is trading around $7,434.

Aussie Market Today.

Equity markets should weaken on the day. Bonds should rally.  However on the day, one should remain wary of any comments relating to trade. The Chinese delegation is meeting with the U.S. to discuss trade and how China should behave with respect to trade.

Geopolitical risks remain high.

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