On a day when markets should have been positive, they weren’t. Instead markets were left confused, dazed and befuddled, not knowing what to do. Was it a risk off day now that Tillerson has been sacked and replaced by Pompeo or was it risk on? Confusion reigns and for many U.S allies they must be considering whether the U.S. is a casual onlooker, a protagonist, or an ally.  The actions of the White House are confusing at best.

On the day, inflation numbers were released, and they were quite benign. The inflation scare may be over for the moment. The numbers read a bit like the Goldilocks story, not too hot not too cold but just right. This means the Fed is not under any real pressure to hike and runs a little with Neel Kashkari’s thesis that the Fed does not need to tighten in a real hurry.

The main consumer price index rose 0.2% and rose 2.2% for the full year. Today should have been a great day for equities, after all bonds could rally as there is no fear of inflation, the Fed did not need to hike, and valuations looked safe. But they didn’t.

Instead the markets were treated once again to the White House circus and this is where the confusion arises.  Everyone knows that Tillerson is a free market person and is quite considered in his actions. Now, however, steering the ship we have a person who is relatively unknown.  However, that person is also more nationalistic.

Pompeo is believed to not be a free market person.  And this is why markets are confused.  Pompeo is a hawk.  Given his views, he could be a destabilising influence across trade, with the U.S. allies with whom Tillerson sought to build strong ties. A number of deals,  such as the Iran deal,  are now in jeopardy of being scrapped.

Earlier in the day the markets were dealing with a reasonable inflation number and whether European growth would be sufficient to purchase U.S. inventory and thus drive the U.S. economy forward. These earlier discussion points are now being cast aside whilst investors decide what Pompeo stands for and how his influence will impact on European trade negotiations on tariffs.

On a day when there was much confusion, the White House appeared to not support Theresa May’s naming of Russia for a recent terrorist attack/murder of a former double agent. The Trump Administration is appearing to go to great pains and not name Russia, and in the same manner the Republicans have cast aside Mueller’s investigation to state there was no collusion.

The enmity between the Democrats and Republicans must now be at an all time high given the Republicans are still trying to investigate the 30,000 emails that Hillary Clinton deleted all those years ago.

On a day that was to be a risk on day, the circus produced a risk off day. Investors were dazed and have to contemplate what onerous tariff conditions will be placed on Europe and what retaliatory steps Europe will take with the U.S.

For places like Australia, this is of little consequence as the trade flow is very much in favour of the U.S. For the Europeans they are likely to see tariffs on cars and a number of capital goods as well as raw products. The introduction of tariffs is now expected, and this will unsettle equity markets.

For bond investors, this uncertainty is a manna from heaven. Lower inflation means there is less to worry about for the moment.  Today’s auction of the 30-year treasuries demonstrated that there were still pockets of demand. Direct bidders took up 14.75% of supply, the largest slice since October 2015.

The inflation result has led to an expectation that the Fed may only tighten three times in 2018.  With inflation out of the way, the deficit looms.  However, the issues relating to a burgeoning significant deficit are being largely ignored.

With the political circus and the uncertainty being created some investors are looking for a safe haven and this is more likely the reason why risk on trades were reduced in favour of risk off trades.



Equities: The S&P 500 fell 0.64 %. The Dow fell 0.69% and the Stoxx 600 fell 1%. The Vix closed at 16.3.

Currencies: The Bloomberg Dollar Spot Index gained 0.5%. The euro rose 0.4% and the pound rose 0.4%.

Bonds: The ten-year closed around at 2.844%. The 2-year closed at 2.25% and the 30-year closed at 3.098%. The ten-year bund closed at 0.619 and the UK gilt closed at 1.487% and the OAT closed at 0.862%. The U.S. curve closed 2/10 at 58.5 bp, 2/30 at 84 bp and the 10/30, closed at 25.4 bp. The U.S. 5-year closed at 2.62.

Commodities: The WTI fell 1.2 % while gold rose 0.2%.

Bitcoin is trading around $9,040.


Aussie Market Today.

The Aussie equity market will be somewhat confused. The outbreak of peace talks that soothed the markets earlier is now likely to change direction. Pompeo is a hawk and no doubt will want tougher conditions on North Korea and as such may destabilise any talks to be held between Trump and Kim Jong Un.

Expect equity to be weaker on the day as geopolitics will dominate the scenery for some time.

Bonds should be steady to slightly improved. This period may become a risk off period in which case we could see solid gains for bonds.

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