WHAT A SHEMOZZLE!

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A couple of things happened Friday. First, there was an outbreak of supposed peace as Trump took centre stage and claimed to have forced North Korea to its knees after ramping up sanctions against the rogue State.

Second, there was the supposed change in tariffs with a number of countries provided so called exemptions on their steel exports. Canada and Mexico were granted an exemption if they agreed to new NAFTA terms whilst Australia found itself in a very curious position, after the Prime Minister Turnbull announced a settlement.

Given Australia has a light tariff policy with the U.S. Australia should have cut a far better deal. Steel and aluminium exports to the U.S. account for about $545 mio which is miniscule. Australia sends over significantly more lamb and beef which do attract a tariff in the U.S. Lamb attracts a tariff because the U.S. wants to support a fledgling lamb industry worth about $300 mio.

Australia imports our farm equipment from the likes of Caterpillar and John Deere, and of course the fighter jets. The trade flow is very much in favour of the U.S. However, this is the way Trump likes to negotiate by forcing those without much muscle to back down.

Europe, for instance, and China have not wavered from their positions.

The equity market rallied Friday largely on the payrolls but also a little on the North Korean announcement. The jobs data was strong but was a little confusing. The U6 number (underemployment rate) remains steadfast at 8.2%, so nothing is changing too rapidly. What was observed was an increase in people with a full-time job also working part time, which is somewhat curious if everything is good.

The jobs number showed us  that unskilled jobs are still being filled and skilled jobs less so. Wages growth remains steadfast at 2.6%.  And with many menial jobs being held by workers that are vulnerable to deportation, it is hard to see how wages will grow any time soon. The real worry is the lack of skilled employment growth. If Trump wants to make America great again, that will come from a skilled workforce not a relatively unskilled workforce.

Following the jobs report, the equity market was in heaven again. The Goldilocks scenario continues. Wages growth is not accelerating, therefore the Fed won’t be hiking rapidly and this makes valuations far more palatable. Hence, the equity market rallied.

Across the pond, the ECB policy makers were suggesting that the ECB could start to move rates higher in mid-2019 after winding down their bond purchases at the end of this year.

In other news, Deutsche Bank wants to sack 6,000 employees from its retail banking division and senior staff were denied bonuses.

 

Recap. 

Equities: The S&P 500 rose 1.7 %. The Dow rose 1.77% and the Stoxx 600 rose 0.4%. The Vix closed at 14.64.

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

Bonds: The ten-year closed around at 2.89%. The 2-year closed at 2.26% and the 30-year closed at 3.16%. The ten-year bund closed at 0.648 and the UK gilt closed at 1.49% and the OAT closed at 0.893%. The U.S. curve closed 2/10 at 63 bp, 2/30 at 89.6bp and the 10/30, closed at 26.2 bp. The U.S. 5-year closed at 2.65.

Commodities: The WTI rose 3.2 %.

Bitcoin is trading around $9,508.85

Aussie Market Today.

The Aussie equity market will no doubt be stronger today following the rally in the U.S and elsewhere.

Bonds will be a reluctant seller on the day as bonds weakened in the U.S. and also Europe. The selloff should be relatively muted however the trend over the next few months is likely to be higher bond yields.

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