THE POWER OF EXPECTATIONS

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Expectations are a wonderful and powerful emotion and it was that emotion that drove markets on Friday. With the GOP making noises that they can get the Budget Bill and Tax Reform by Thanksgiving, expectations are building. The reality show of who will be the next Fed Chair continues with Trump talking Powell’s chances up.

But with all good reality programmes there is always a twist and Trump is the master of the reality show. After all Trump ran a very successful reality show for some 30 years so he knows all the twists and tricks. I still think Taylor is a strong chance and in which case markets have not adjusted for his more hawkish tone.

The GOP won’t reveal their Bill until Wednesday. There is an expectation that some deductions that make housing affordable will be removed and a powerful housing industry trade group (National Association Of Home Builders) has already suggested that the Bill will be rejected.  The Bill that promises to deliver (expectation) about $6 tr in tax cuts faces significant challenges even from its own rank and file members. Trump is also looking to make changes to the 401k plans and this would affect many millions of workers.

The bond market and equity market rallied on Friday. That rally was primarily due to the possibility of Powell. U.S. GDP came in at 3%, which was better than expected. However,  the focus really is on Trump’s announcement this week on who will get the nod. With the possibility of Powell, the bond market recovered and rallied some 4 bp in the long end. It would seem that Yellen or someone at least in the Fed has been advised that the current Chair Janet Yellen will not be given a second term.

So, the expectations all hinge on this week and how those expectations are managed will be interesting. We have Trump’s selection for the Fed Chair and the tax policy revealed. Expectations are heightened, and all will be revealed later this week. What follows next is anybody’s guess.

What will be interesting to watch will be the revelations by Mueller. The expectations are that his first victim will be arrested Monday and we have Trump going ballistic complaining to anyone who will read his Twitter how bad Clinton and the Democrats are and how this Russian thing is all a beat up. Whether it is or not will depend on the evidence that Mueller provides. Only time will tell and that’s another expectation.

Recap:

Equities: the S&P 500 rose 0.81%, the Dow rose 0.31%. The Stoxx 600 rose 0.55%.

Currencies: The euro fell 0.4 % over concerns with Catalonia  and the pound fell 0.3%.

Bonds: saw buying across the curve.  The 2-year strengthened 2bp to close at 1.619%. The U.S. 10-year closed 2.416 % in about 5bp. The 30-year closed at 2.925 % in  about 4 bp on the day. The yield curve maintained its shape. The European 10-year benchmark closes were, gilts closed at 1.347%, bunds at 0.38% and OAT’s 0.634 %.

Commodities: Gold fell 0.5% and WTI rose 2.5%. Copper fell 2.2%

Aussie Market Today.

The trend is your friend as they say and there is no reason for bonds to sell off just for the moment. Equities look set for another positive day.

Geopolitical risks appear to be waning at present. However, that could change very quickly.
Credit for the moment appears well bid and demand continues.

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