IS THE TIDE TURNING?

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Markets over the last few days have been traded relatively thinly but the consistent theme has been taking risk off the table and watching bonds rally just a little. Maybe markets are sanguine because yesterday marked the tenth anniversary of the collapse of Bear Stearns.

Or maybe they are concerned about tariffs.  Or maybe they are concerned that despite all Trump’s bluster and his recent campaigning in Pennsylvania, the Republicans and Trump are losing their edge.

You see, the special election in Pennsylvania ought to have been a slam dunk. The Democrats by all accounts should not have even attempted to play in the election let alone succeed. The Republicans last won the seat by a margin of 20 points in 2016.  Today it is too close to call and the Democrats and Conor Lamb are claiming victory.

If the Democrats do indeed win the seat, then that will make a number of Republicans twitchy about their prospects later in the year when mid-years are held.

Today, Trump made Larry Kudlow his appointee as his economic adviser.  And his appointment has dismayed a number of Republicans. The TV personality has earned the ire of a number of Republicans over the years. Rand Paul has already declared he will challenge the appointment and also that of Pompeo.   McCain is not happy with Haspel’s appointment to head the CIA due to her enthusiasm for waterboarding and enhanced interrogation techniques.

As usual,  politics are playing a big part in the way the markets are currently behaving. Consumer spending has softened and this has concerned equity markets, but so is the confusion surrounding tariffs. It appears as though tariffs will be implemented across a number of commodities and goods. Of concern will be how other countries handle the imposed tariffs.

Angela Merkel has suggested that Europe show a united front.  She appears to be quite forthright in her rhetoric and her calls for stiff tariffs on U.S. goods should Trump impose tariffs on European goods. Equity analysts are concerned that the addition of tariffs may slow world growth and that means a slowing economy.

The irony is that Trump, according to his newly appointed economic adviser, wants a strong dollar. This is counterintuitive to increasing trade and reducing deficits with other countries and has the potential to price many U.S. goods out of many markets.

For the bond traders, all this uncertainty is music to their ears. It means that bonds can rally a little further and they did.  For the moment, bonds look like a relatively safe investment. And that probably will be the case for a while.

Whilst rates remain persistently low, the seeds of discontent will take some time to germinate. Total U.S. debt is around 250% of GDP,  a crisis-era peak. China’s is higher. Company debt in the U.S. is now 34% of assets by the end of 2016, the highest since 2000.  And 2017 will be higher.

Debt burdens are not onerous given the current level of interest rates.  However, should rates spike like they once did let’s say 1%, this debt burden would become problematic.

On the day, bonds rallied because of several factors. Strangely lack of supply caused 30-year gilts to rally and are now around 1.822%. Asian bonds were sold because of trade war fears creating demand for U.S. treasuries which are now becoming the safe haven trade. All the while treasuries were being bought because the equity market was selling.  Talk of tariffs leading to an economic slowdown and geopolitical risk were driving investors to reconsider bonds.

All this uncertainty has driven the treasury market and flattened the yield curve. The bond market was not so concerned about growth as the short end did not react that much. Most of the movement was in the longer maturities suggesting the bond rally was more about risk!

Recap. 

Equities: The S&P 500 fell 0.57 %. The Dow fell 1% and the Stoxx 600 fell 0.1%. The Vix closed at 17.23.

Currencies: The Bloomberg Dollar Spot Index fell 0.1%. The euro fell 0.2%.

Bonds: The ten-year closed around at 2.82%. The 2-year closed at 2.26% and the 30-year closed at 3.06%. The ten-year bund closed at 0.589 and the UK gilt closed at 1.433% and the OAT closed at 0.836%. The U.S. curve closed 2/10 at 55.5 bp, 2/30 at 79.5 bp and the 10/30, closed at 23.8 bp. The U.S. 5-year closed at 2.61.

Commodities: The WTI rose 0.3% gold fell 0.1%, copper rose 0.6%.

Bitcoin is trading around $8298.4. Bitcoin over the month has fallen 21%and has fallen 42% over the year to date. However, on a 6 month roll it is up 157%.  That’s what I call volatility.

Aussie Market Today.

The Aussie equity market will be weaker as risk off trades are dominating the markets.

Bonds should rally as more investors purchase bonds in response to weaker equity markets.

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