KING DOLLAR.

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When Larry Kudlow held his first press conference on CNBC after being appointed Trump’s economic adviser, the first thing that he said was making the dollar, King Dollar. This was a phrase coined by Larry all those years ago when he started out in media. The parochial comment comes as no big surprise as both Trump and Kudlow see the strength of America and the fortunes of America indelibly linked to the strength of the currency.

The only problem is, the U.S. Dollar is trading in line with its average value since Nixon broke the nexus between gold and the U.S. Dollar.   It’s  also trading around its 20-year average. The policies that both support  are also policies that are likely to weaken the dollar over the medium term.

The tax cuts designed to stimulate the economy and create growth have been made when the economy is at almost full employment. The stimulus is more likely to create inflation rather than accelerate economic growth.  Besides, much of the tax cut is being used to boost dividends and share buybacks,  neither of which are notable economic stimulators.

Then you have the issue of attracting capital. The U.S. deficit is rapidly rising and to attract capital the dollar has to weaken, and interest rates rise. The bonds are already a high yield bond compared to its European trading partners.

Then you have the issue of reliability. In the past,  the U.S. was always seen as a reliable trading partner and defence partner. That is already changing. Trump has implied that he will take the 32,000 troops stationed on the Korean Peninsula away if the South Koreans don’t agree to trading terms. This no doubt made Kim Un Jong very, very happy. Similar insinuations have been made to Europe as well.

The point is, that as a safe haven, the U.S. may start to lose its appeal. Who wants to partner with an unreliable partner? For the likes of Mitch McConnell and the things he stands for this should be an anathema, but it isn’t.  And that’s a concern. What do the ratings agencies do if America loses its lustre as a safe haven and a dependable strong ally when the U.S. has a burgeoning deficit?

Only time will tell but if Trump wants to make America great again.  Then money should be directed towards education and especially in those states all 13 of them where science is no longer taught and intelligent design is taught as the new science. In those states, it is difficult to study biology and physics, for instance.

However, before Trump can make America great again, he may have to deal with Mueller’s Russian investigation. Today, Mueller subpoenaed the Trump Organisation as part of his investigation. This could turn ugly as the Republicans try to influence an outcome and if Mueller stays resolute.

These events, however, did little to influence market movements. Early on the equity market caught the jitters as the 10-year passed briefly through 2.80%, before settling around 2.82%. The pipeline companies were sold as a result of losing a tax loophole. The Federal Energy Regulatory Commission ruled that master-limited partnerships could no longer recover a key income-tax allowance. Gold was sold after Kudlow said that he would sell gold and buy dollars.

U.S. commercial paper supply this week contracted as the rise in short term rates in recent weeks dampened issuance. The amount of outstanding CP fell by $12.5 bio over the previous week to an 11 -week low.

Interest rates on 3 mth CP issued by banks was 2.01%, levels last seen in 2008. The previous week’s  average was 1.99%. For non-banks, the average was 1.90% versus the previous week of 1.85%. The Libor -OIS widened to 50.65bp, a level not seen since 2012. At the end of 2017, it was 27.83bp. The Libor-OIS spread is seen as a gauge of stress in money markets
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Ahead of the Fed’s meeting next week, markets are somewhat twitchy. The equity market volumes are down. The expectation is that the Fed will hike next week.  However, markets will have to look to economic data to determine the economic strength before making any key decisions. The market feels as if it is running an each way bet, with investors undecided whether they are taking risk off or wish to put risk on.

Recap. 

Equities: The S&P 500 rose 0.47 %. The Dow fell 0.08% and the Stoxx 600 rose 0.5%. The Vix closed at 16.59

Currencies: The Bloomberg Dollar Spot Index gained 0.5%. The euro fell 0.5%.

Bonds: The ten-year closed around at 2.83%. The 2-year closed at 2.287% and the 30-year closed at 3.058%. The ten-year bund closed at 0.574 and the UK gilt closed at 1.438% and the OAT closed at 0.822%. The U.S. curve closed 2/10 at 54.1 bp, 2/30 at 77.1 bp and the 10/30, closed at 22.8 bp. The U.S. 5-year closed at 2.627.

Commodities: The WTI rose 0.4% gold fell 0.7%, copper fell 1%.

Bitcoin is trading around $8,267.

Aussie Market Today.

The Aussie equity market will be a little confused on the day. I expect some gains over the course of the day however as we move into the afternoon session I expect further selling as the risks of uncertainty are rising.

Bonds should be steady on the day. With uncertainty rising, the risk off trade on balance appears to be the favoured trade.

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