CHINESE WHISPERS.

CHINESE WHISPERS

On Monday, markets reacted to news that Mnuchin was in favourable discussions with the Chinese and the equity market rallied on the whisper. Monday was a great day for those with risk on, and today looked as good. Early on the equity market rallied but then two pieces of news came out.

The first and probably the more important piece was, well the trade stuff with China is not quite as good as Mnuchin described. There are a few wrinkles, well large wrinkles, that need to be ironed out.  And, in between, both parties were accusing the other of harming free trade.

The U.S. is putting into practice restrictions on Chinese companies wanting to invest in technology companies and other investments. The U.S. wants access to the Chinese market without the need of a Chinese middleman or exchange of technology.

The other piece of information was that Facebook is likely to face government scrutiny and perhaps an increased regulatory environment. Zuckerberg declined to face the UK Parliament sending a senior company person instead.  However, that won’t wash all that well with the British and the Europeans who also wish to interview Zuckerberg.

Either way, the spat continues and until the final details are ironed out, markets will swing wildly between risk on and risk off. After a pleasant morning, equities sold off and technology stocks led the way down. Tech stocks fell 6%. Facebook continued its decline by falling 4%. One glimmer of hope was GE. The embattled company may have found a white knight in Buffet and rallied 5% today on the rumour.

Bonds rallied on the risk off trade.  However, much of the interest was in the longer end of the bond market. The $30 bio 2-year note along with the $51 bio 3-month bill and $45 bio 6-month bills drew soft demand. Consumer confidence is somewhat dented falling to 127.7 from 130 in February (revised).

Trade policies seem to be the drivers of market sentiment and directions.  Until some clarity is achieved, the markets will be subject to Chinese whispers and fluctuate accordingly.

Bonds for the moment are behaving.  But at some point, either the currency or the bonds will slip. Put into context, the borrowing cost on a 3-month T Bill at 2% is $750 bio.  That’s about 25% of the Federal Tax revenue (which is currently falling) and it is larger than the U.S. Defense budget of $710 bio. Forget about inflation, it’s the debt trap we should be worried about!

The euro received some good news. Inflation looks likely to remain subdued even with solid growth. As a result, the euro slipped.  However, export stocks in the region rose.

Recap. 

Equities: The S&P 500 fell 1.7%. The Dow fell 1.4% and the Stoxx 600 rose 1.2%. The Vix closed at 22.5.

Currencies: The Bloomberg Dollar Spot Index rose 0.3%. The euro fell 0.4%. The pound fell 0.5%

Bonds: The ten-year closed around at 2.777%. The 2-year closed at 2.27% and the 30-year closed at 3.027%. The ten-year bund closed at 0.502 and the UK gilt closed at 1.419% and the OAT closed at 0.731%. The U.S. curve closed 2/10 at 50.5 bp, 2/30 at 75.50 bp and the 10/30, closed at 24.8 bp. The U.S. 5-year closed at 2.57.

Commodities: Gold fell 0.7%. Copper rose 0.4%

Bitcoin is trading around $7,923.

Aussie Market Today.

Expect a troubled day for equities. With risk off being the theme and trade wars in the thick of discussions, commodities are likely to be pressured.  And so too the Aussie share market. The only caveat being that as and when trade with the U.S. ceases to be a problem for China or we receive more details relating to trade, then the equity market will remain nervous and subject to days of risk off.

Bonds to rally because it’s a risk off day. The days, however, of not shorting the bonds are becoming fewer as the risks for bonds climb. Over time, markets will fret over lost economic growth caused by the distraction of the trade blow-up and a possibly over aggressive Fed reacting to inflation as a result of tariffs. Put that in context with a widening deficit and it’s a nasty brew.

Bonds will inevitably rise and so too the Aussie bonds.

For the banking sector a rise in U.S. bond rates will make funding costs rise as much of the Australian banks funding is in U.S. dollars.

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