QUIET BEFORE THE QUIET

uk red sky

Today, in parts of the UK, it was a red sky day. No, it was not coloured red by the entrails of gutted traders. Rather, it was all to do with Hurricane Ophelia lashing the Irish coast. The winds bringing dust, forest fire debris from Portugal causing the light to split and the red part of the spectrum being transmitted, with no blue light being transmitted as it had been refracted away the sky was red. That was probably the most unusual part of a day that otherwise was rather undramatic and quiet.

The Brexit talks continued today in Brussels and were held in a somewhat convivial atmosphere although no new negotiations were made. Just that May and her team were rather relaxed on the day and were looking to enter into negotiations in the right spirit, whatever that means. So, nothing done there yet.

So, back to the States where the equity market continued its solid run. The prevailing theory appears to be that all the bad news is out there already so any news now must be good news. And with Central Banks still adding liquidity then that liquidity has to be invested, ergo equities look appealing.  The company reporting to date has been positive and that will help the tone of the market to remain positive. It is hard to contemplate just what will upset the equity market. After-all we have had threats of nuclear war, oil shortages, massive hurricanes, and an Administration that has largely been ineffectual. Yet the equity market still rallies.

Bonds retreated a little and that was more to do with Yellen’s speech on Sunday where she suggested that rates could be hiked this year and the outlier was inflation. The stronger than expected manufacturing report released by the NY Fed also played its part in a minor selloff.

The manufacturing report was the highest reading since September 2014. New Orders Index was up 18, Employment Index up 15.6.  A precis of Yellen’s speech is the Committee will ignore the disappointing string of core inflation reads and continue to deliver a hike in 2017. This means another rate hike perhaps. The yield curve flattened and that was more to do with the shorter maturity yields rising faster than the longer dated maturities. All in, the curve flattened about 3 bp. What it does say, however, is that in any sell-off long bonds appear to be desirable. The probability of a rate hike in December now stands at 78.3%, the highest it has been for some time and in June 18 the odds are 92.2%.

The markets are also looking to an announcement regarding the next Fed Chairman. The odds are getting rather short for Yellen to stay in her post. However, the odds are lengthening for the favourite Warsh and for the new candidate, Taylor, those odds have shortened. Who chairs the Fed next will have the full weight of market expectations. Taylor has been a critic of the Fed in the past and is a monetary policy expert. He believes the Fed should be more transparent in what it is trying to achieve and has a rather prescriptive method for policy.

Meanwhile, the U.S. finds itself trying to contain another massive oil spill. The spill is large enough to rival the BP’s Deepwater Horizon rig. The culprit, The Delta House floating production facility, has a fracture in its flowline jumper.

Meanwhile, it looks as though Trump and McConnell have kissed and made up. Trump has suggested that tax reform will take time and McConnell is on track to push those reforms through before the end of the year.

The big discussion revolves around NAFTA. The U.S. is playing hardball and trying to coerce Mexico and Canada into a position where they compete against each other. The tactic does not appear to be working as well as the negotiators hoped. Trump continues to say he will walk away, despite the possibility that a large number of GOP donors would be disadvantaged. There is also debate as to whether Trump requires Congressional approval to leave NAFTA. Mexico has stated that it will not negotiate during the 6 month termination period.

Market Recap:

Equities: the S&P 500 rose 0.2%, the Dow rose 0.37%. The Stoxx 600 unchanged.

Currencies: saw the U.S. Dollar Spot Index gain 0.2%. The euro fell 0.2% and the pund fell 0.3%

Bonds: were slightly weaker. The U.S. 10-year closed at 2.30%. The two- year bond closed at 1.538% up about 4 bp. The 30-year closed at 2.818% up 1 bp on the day. The yield curve flattened about 3bp.
The U.S. bond curve flattened with the 2/10 closing at 76.2 bp, the 2/30 at 127.9 bp, and the 10/30 closed slightly wider at 51.5bp as the curve flattened between 2-years and the longer dated maturities.

Commodities: Gold fell 0.7% and WTI rose 0.8%. The rise was largely due to the Iraqi Army taking Tikrit oil fields from the Pashmerga. Copper rose 3.4%.

Aussie Market Today.

Aussie bonds will continue to trade in a tight range and are likely to soften a little on the day. Equities will continue in its bullish trend. Expect credit to tighten over the day. The new Bendigo Hybrid should be well bid and that will cause some selling of hybrids as investors look to invest in the new hybrid.

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