Where once Europe was the problem child for investors, the U.S. is rapidly now becoming that problem. Political uncertainty is clouding the issue and so too self-centred behaviour. So, what is at stake? For investors, the lack of clarity around the debt ceiling is developing into a problem. Trump’s missive today aimed at Ryan and McConnell is the classic it’s their fault not mine comment. What Trump did was remove himself as the root cause when in fact he is the cause.
Trump has said the GOP is to blame for not coming up with the appropriate bills, when in fact it is his Administration which is to blame. Mnuchin and Cohn are supposed to be providing background and crafting Trumps vision into some form of document which we have been waiting for since around March. Remember it was going to be a fabulous document and I will be releasing it in 2 weeks. That is some 5 months ago.
The Administration appears to be incapable of delivering policy and that is making the debt ceiling issue all the more problematic. Without policies or knowing how the money is to be spent why would you pass anything? Meanwhile, the Ratings Agencies and bankers appear to be deaf to the debate, as long as they get their tax cuts, they don’t care. Where are the howls that we once heard of deficit, deficit, deficit, or the debate about unrestrained spending? There is no debate. Simply put they don’t care and it’s all the Democrats fault!
The debt ceiling looks to be a problem, Trump has said as much and distanced himself, even though he added fuel to the fire, earlier in the week. Fitch has said it would look at the problem and that a downgrade was possible. Moody’s have said as long as debt servicing remains in place it is ambivalent to everything else and as such the AAA is not in jeopardy.
Amazon gets the keys to Wholefoods on Monday. Amazon has already announced that on Monday wholepay will reduce the cost of its grocery items significantly. This announcement caused major downgrades for grocers. Sprouts Farmers Markets and a number of wholefood grocers were heavily discounted on the day with Sprouts falling some 7.2% from the opening.
Equity markets had a minor tumble on Trump’s missive, but are in reality more focused on what is released at the central bankers’ gabfest in Jackson Hole. Comments by Yellen and Draghi will take centre stage. It would appear unlikely that investors will rush in to buy at the moment with the debt ceiling looming and the transitioning between purchases and no longer purchasing of assets by both the Fed and the ECB. The U.S. equity market is starting to look very expensive. The European market is looking fair value. With many U.S. firms easing back on buybacks, the equity market could normalise.
The Dow fell 0.13%, the S&P fell 0.2%. The Stoxx 600 fell 0.2%.
U.S. bonds weakened on the day with weakness attributed to possible policy changes by the ECB and the Fed. Expectations are that the ECB could announce a halt to QE and for the Fed to outline how it will start unwinding its portfolio.
On the day, the benchmark closes were as follows. U.S. 2-year 1.33%, 10-year 2.196% and 30-year 2.769% all out approximately 2bp. The curve remains steady. The European benchmarks were as follows gilts 1.05%, bunds 0.372% and OATS 0.685%. The probability of a rate hike in December is 29.4% and a hike in June 2018 is 56.8%. Markets are starting to doubt whether the Fed can raise rates anytime soon.
WTI fell as Hurricane Harvey approaches the Texas coastline. Oil was down 2%, and is on track to post its fourth weekly decline. Gold fell 0.2%. Cooper output in the Congo rose 15% yoy and cobalt output surged 27%. The Congo is Africa’s top producer for copper. Copper rose 1.9% and the price rises are being driven largely by Chinese demand. Refined imports to China rose 13% in July. Vanadium is yet another metal being pushed higher by Chinese demand and has risen some 90% this year and is trading to nearly the highest level in nearly 10years. China’s antipollution drive is pushing demand.
Aussie Market Today
Equities could drift lower and bonds rally on the day, post international developments.