To coin a phrase from that wonderful marketing pitch for food products, McCain you’ve done it again. And John McCain certainly has. The equity markets went into overdrive when McCain announced that he was supporting the GOP Tax Bill in the Senate. One cannot be sure if this is McCain’s last hurrah or if he is foxing so that when the final votes are cast he votes with the Democrats and embarrasses Trump.
For the remaining 4 or so undecided GOP senators, McCain is held in high esteem, but this does not mean they will follow his example. The ballot remains on a knife edge as the movement to vote on the Bill gathers steam.
The equity market took the news of McCain supporting the bill with a cheer and charged full steam ahead taking the Dow some 1.19% ahead with the Dow breaking the 1000-point barrier in some 30 trading days. Equity markets were buoyed by the news but also gained comfort from the GDP growth now at 3.3% annualised. What can go wrong? The economy is growing, global growth is expanding, and inflation is tepid.
Sentiment is shifting and shifting rapidly. The equity market looks like it can rally a lot more at this stage. Bonds, however, did not take the news kindly. With looming issuance and tepid demand and concerns over growth leading to inflation, bonds retreated some 4 points with 10-year treasuries rising to 2.41 %.
The yield curve flattened a little. However, sentiment on Fed Funds still has two rate rises factored in for 2018. By December 2018, Fed Funds are expected to be around 2%. The probability for a hike in December is 95% and in June 2018 99%. As such, the bond market cannot be anymore, certain. At some point, the increasing deficit will become a problem and bonds will rise in yield accordingly.
The one factor however that markets are overlooking is the Trump factor and the chaos within. It looks likely that Trump will replace the at odds Tillerson with Trump’s recent hire Mike Pompeo, currently the CIA chief. It would appear as though Tillerson’s moron comment and his reported non-assistance of Trump’s daughters visit to India to speak on Women in Business did not go unnoticed.
Pompeo is said to share Trump’s views on immigration and disdain of the Iran deal and supports Trump’s support of the Saudi regime in their allegations of Qatar supporting terrorism. Tillerson and Trump have been at odds for some time. For the GOP, this is yet another hiccup and more chaos.
Strains between the UK and the U.S. are rising as the U.K. Government requested the White House to not retweet comments from the far right and especially racist commentary. Some Parliamentarians have requested that the President’s trip to the UK be cancelled.
In yet another twist, the Russians, fearing looming sanctions, are about to launch a yuan bond issue. It appears as though this bloc between China and Russia is rapidly strengthening as the U.S. pulls itself away from the region and influence wanes.
Equities: The S&P 500 rose 0.7%. the Dow rose 1.14% The Stoxx 600 fell 0.3%.
Currencies: The Bloomberg Dollar Spot Index was little changed. The euro rose 0.4%.
Bonds: the 2-year rose to close at 1.786. The U.S. 10-year closed at 2.41%a rise of 5bp. The 30-year closed at 2.826 %. The 2/10 closed at 62.4, the 2/30 at 104.2 bp and the 10/30 closed at 41.60 bp. The European 10-year benchmark closes were, gilts closed at 1.326%, bunds at 0.365% and OAT’s 0.522%.
Commodities: Gold rose fell 0.7% and WTI was steady. Copper rose 0.2%.
Aussie Market Today.
Aussie bonds may well be sold today. With a spread of just 11 bp between U.S. 10-years and Aussie 10-years, there is little margin for error. The Aussie bonds appear to be holding steady with movements in the U.S. and could possibly even break to trade inside the U.S. if the current trend continues.
Equity markets will rally following the lead from the U.S.
Geopolitical tensions have risen. However, the markets now see North Korea as a minor irritant and missiles being lobbed over Japan look more likely to be treated as an irritant. North Korea could be an issue if it detonated another nuclear device.
Demand for solid investment grade credits look likely to continue as the hunt for higher yielding assets continues to gather pace. With the equity market rallying the outlook for credit remains very positive.