PARDON ME!

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Today was an exciting day if you were turkey. You see, as we head into the Thanksgiving holiday, which is the start of holiday season as well, the turkey plays an important point in the celebration. The turkey takes pride and place on the dinner table. So today, as far as two turkeys were concerned, was an important day. The President pardoned Drumstick.  And Wishbone, who was due for the chopping block was also pardoned.  Today, at least two turkeys won’t meet their maker.

For markets, we were enthralled with the pageantry of the event. Markets staged a rally in celebratory support, breathed a sigh of relief as a long weekend looms and look forward to the break.

The big movers of the day were the FANG once again. Tech stocks are propelling the equity markets to new highs and it’s the technology sector that has largely driven the markets. Apple was up 1.9%. The transport sector however, to me,  is a concern. Some pundits believe otherwise and base their views on declining revenues and the impact of weather related events. And this view is intriguing because that’s exactly my concern.

Weather events slowing growth, driving down profits but also as a leading indicator to the health of the economy. If those pundits are correct then the next four weeks as we run into the Holiday season is critical. As people do their online purchases, transport becomes important. Across the board the transport sector has lagged.

The U.S. economy does look a little vulnerable, however. The performance of its equity market has been largely due to improving fortunes of its multinationals and the tech stocks. The multinationals have benefitted from booming economies elsewhere and in particular some strong currency gains. In many respects, the U.S. equity market has been a laggard compared to Europe and the growth opportunities for a while have seen abundant.

The latest report from the OECD however demonstrates that growth has slowed in many of the developed economies. According to the report, Japan and France are the main culprits.  However, the U.S. has also slowed according to the report. The combined output from the 35- member countries in the June quarter was 0.8% compared to 0.6% this quarter. A marked slowdown. The yoy growth is currently 2.6% compared to 2.4% in 2016.

Bonds staged a slight rally on the day, at least they did  in the longer maturities. The yield curve continues to flatten and is the flattest now for some 10-years.

The big news though for the moment is that Orrin Hatch has been given the baton to try and obtain the necessary votes to get Trump’s Tax Bill across the line. With the numbers delicately poised, Hatch has to somehow hold onto 2 members who are at distinct odds with Trump and another 6 members who have concerns about the budget and the blowout in debt.

If the Bill passes the Senate, the Bill will have to return to the House to be reconciled with what the House voted for and then submitted for a vote in both chambers. This seems to be a remarkably tall order to be completed before Thanksgiving as Ryan suggested and seems more likely that if the Bill is passed it will happen in 2018.

Recap:

Equities: The S&P 500 rose 0.65%. The Dow rose 0.69%. The Stoxx 600 rose 0.4%.

Currencies: The Bloomberg Dollar Spot Index fell 0.2%. The euro fell 0.05%. The big winners on the day were the Mexican peso and the loonie, both currencies benefitting from a favourable report on trade terms in NAFTA. The peso gained 1% and the loonie gained 0.3%.

Bonds: the 2-year rose to close at 1.77. The U.S. 10-year closed at 2.36%, a slight fall in yield. The 30-year closed at 2.762 % in 2 bp. The curve flattened. The 2/10 closed at 58.5, the 2/30 at 98.6 bp and the 10/30 closed at 39.9 bp. The European 10-year benchmark closes were, gilts closed at 1.27%, bunds at 0.349% and OAT’s 0.505%.  Political uncertainty does not appear to be affecting the bund’s performance.

Commodities: Gold rose about 0.2% and WTI rose 1.0%. Copper gained 1.2%. The deficit in platinum is expected to increase sharply.

Markets are now bracing for the affects of the Chinese steel and aluminium winter cuts. With aluminium, the whole supply chain is affected from coking coal through to the raw product. Output is expected to be cut by 30%. Suppliers of carbon products to cut by 50%.

Sinter and iron-making facilities are required to shut 50% capacity.

Aussie Market Today.

Aussie bonds will continue to go their own way today. Expect some curve flattening as the U.S. continues to flatten.

Long bonds may weaken slightly. However, the demand for yield will see the bonds steady in any sell off. The issue once again is the spread between U.S. bonds and Aussie bonds. This spread is currently around 20 bp and looking to get tighter. For the moment the currency is taking the hit at 75 cents. This trend looks likely to continue as the Fed looks to raise rates in December.

Geopolitical tensions are still a concern although tensions appear to have been cowed for the moment.
Equities are likely to take the lead from the U.S. and rally.

Demand for solid investment grade credits look likely to continue as the hunt for higher yielding assets continues to gather pace.

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