READY SET SHOP!

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Friday marks the day when shoppers shop ’til they drop, and the day is also used as a gauge to indicate sentiment and consumer confidence. This Friday looks like a day for the shopper. So, what do we know or what should we expect? This time last year about 55% of purchases were done online. This is expected to fall to 47%.

Millennials are expected to spend about $100 on themselves and the average spend is expected to go from $500 per person to about $750. A massive increase. Malls and Retail are expecting a lift as they expect shoppers to come in for a shopping experience. The reader may well ask what is a shopping experience and how is it different? Well, it could mean you go into a clothes store and the salesperson works out what you could look good in or what colour suits you. In my case, that’s a lost cause as nothing suits.

What are consumers spending money on, it appears to be largely on themselves and experiential. Some are saying travel, but I don’t know why someone would go to a retail store to buy an experience other than fighting over the Gucci bag that was reduced from $3k to $100. Everyone is shopping.

So why is this information so relevant? It’s because retailers are expecting a massive boost in sales. They make about 50% of their sales during the holiday season, so for pure survivability it’s an important time. It’s a gauge on sentiment and retail sales are an important component on how an economy is faring. Some retailers will struggle over this period. Interestingly, the consumer has not been waiting to make their purchases on Friday, they have been buying since October. This is an interesting development.

Whilst shopping, don’t forget bunds. With Merkel saying she is unwilling to form a minority Government, political uncertainty reigns supreme. With Germany running a large budget surplus, Germany does not need to issue nor is political uncertainty the norm.  In fact, bunds are scarce courtesy of the ECB purchasing a significant portion.

At a time when bunds ought to rally hard, the bunds barely moved. The bund yield curve is pretty much negative out to 8-years and for investors looking to purchase quality flight to safety assets, there are not many available in Germany. The bund is for the moment always bid and any sell off is a buying opportunity. The benchmark 30-year bund goes to auction Wednesday and the size of the issue on further issuance will be $4 bio. Since September this bond has traded in a  14 -basis point range.

If you are shopping for UST’s then good news, the treasuries are slightly weaker. The 2-year weakened in anticipation of the Fed minutes released Wednesday which should show a rate hike in December is likely to occur. The current probability for a hike in December just a couple of weeks now is 98%. The yield curve flattened.

If you are shopping for equity derivatives be wary. Open interest on the various indices is high. Open interest for options on the SPDR S&P 500 ETF Trust rose to the highest level since October 2011. The measure also surged to the biggest on the small-cap ETF as defensive companies regained leadership and the yield curve flattened signalling a potential economic slowdown.

I don’t subscribe to this point of view purely because with the weight of money and global level of low interest rates, U.S. long bonds look attractive when compared to Euro High Yield and U.S. high yield. The curve may well be flattening because short bonds are selling off in anticipation of a hike.

On another index, the fear index,  investors are bracing themselves for what could be a massive unwind. A trader dubbed the Elephant is expected to roll a huge position. The elephant will be looking to buy the Vix as the strategy to date was to short the Vix. About 2 million contracts are expected to roll which is about 3-times the daily average.  Along with “50 cent” another trader with a penchant for buying options around 50c the Vix could be in for an interesting period.

Coming into this week apart from some shopping opportunities, the marketplace is expected to be quiet. Holiday season looms and so too a long weekend. Traders and investors are likely to continue their buying of hedges which to date are increasing to levels not seen for some time. Real money is starting to hedge with gusto.

And in another twist doomsday preppers are losing interest in U.S dollars and are shopping now for bitcoin. How bitcoin works in a doomsday situation is beyond me, but if there is no electricity, servers and modems don’t work, so I bemused somewhat how this all works.

Recap:

Equities: The S&P 500 rose 0.2%. The Dow rose 0.31%. The Stoxx 600 rose 0.7%.

Currencies: The pound rose 0.2%.  The yen fell 0.5%. The euro fell 0.5%.

Bonds: the 2-year rose to close at 1.755. The U.S. 10-year closed at 2.365 % a rise of 2bp in yield. The 30-year closed at 2.782 % up 1 bp. The curve flattened. The 2/10 closed at 60.8, the 2/30 at 102.6bp and the 10/30 closed at 41.6 bp. The European 10-year benchmark closes were, gilts closed at 1.29%, bunds at 0.36% and OAT’s 0.532%.

Commodities: Gold fell about 1.3% and WTI fell 0.8% on concerns about increased gas output.   OPEC meets next week, and traders are wary. It is expected that OPEC AND 10-non OPEC producers will roll their production over for 2018. However, Russia is being coy about its intentions and some doubts remain whether Russia will hold to current output.

The U.S. remains a concern for OPEC as it continues to increase crude production output. As oil has rallied so too has production with the U.S. now expected to produce 10 million barrels a day over the next 3 to 6 months. Copper gained 0.8%.

 

Aussie Market Today.

Aussie bonds will probably go their own way today. Expect some curve flattening as the U.S. continues to flatten. Shorter maturities should remain stable as demand continues. Long bonds may weaken slightly. However, the demand for yield will see the bonds steady in any sell off.

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 slightly.

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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