WHILE TRUMP’S AWAY, KIDS WILL PLAY?

NYSE

That’s the way the market felt today. With a heavy heart the market slipped into a lugubrious state of mind and twitched around the edges. There was no excitement, nothing to think about. With the amount of economic news due later this week, the equity market and bond market slipped into review and monitor mode.

What was interesting was Trump’s prognostications. With no fruits so far on this trip, Trump needs a win or something at least to go back to the U.S. with. To date, he has claimed the stock market rally in its entirety. He has praised The Crown Prince of Saudi Arabia Prince Mohammed bin Salman for his corruption crackdown.  Coincidentally, this has meant the arrest of Prince Alwaleed and others,  some of whom like Alwaleed have been harsh critics of Trump in the past. This may be somewhat coincidental but it appears as though critics of Trump in Government controlled states appear to get arrested or run foul of the Saudi’s as in the case of Qatar.

The crackdown in Saud led to the Tadawul All Share Index to fall. There is concern that rising political tensions between Saud and Iran are at the heart of this cleansing. The Prime Minister of Lebanon, a man under the control of the Saudis, may also be under arrest for meeting with the Iranian Foreign Minister Monday last week.  This is causing a degree of geopolitical instability in the region. Both the Saudis and Israel are expected to exploit the regional instability. The crackdown also weighs heavily on the Murdoch empire and Citibank. Some instability in the Newscorp share registry could see a restructure in Newscorp and imperil the Murdoch grip on the media outlet.

On other news, the Russian probe appears to be drawing more interest. It appears as though Donald Jnr may have shown a little too much eagerness when he met with the Russian lawyer.  He suggested his father would look at a law if the lawyer he met with could provide written documentation regarding some of Hillary Clinton’s donors. The problem with the case and the now famous Paradise Papers is that a number of Trump appointees such as Ross may have tried to mislead on their various businesses and business contacts, and the extent of business done with Russia.

Trump is now in China, and is trying to consolidate his position on trade. With no wins as yet to Trump but a strong victory to Xi Peng, Trump will have his work cut out if he is to extract any trade wins. To date, Trump has been disappointing in his performance with both Japan and Korea because he has not had any trade victories.  North Korea remains a thorny problem.  Trump’s antics will not ease any tensions there between North Korea and its neighbours.

All this activity has led to a rather reserved day. The equity market retreated a little and bonds rallied a point in yield. The 3-year treasury auction was sold at 1.75% the highest for this maturity at an auction since April 2010. The yield curve continued its flattening and is now the flattest for 10 years. The flatness of the curve could weigh on bank profitability.At the heart of the equity retreat is the GOP’s tax plan and budget. Many analysts remain to be convinced on the projected growth and how the increasing debt will be paid. The budget ceiling once again looms large later this month and as such any stalling could bring the budget ceiling back into sharp focus.

Recap:

Equities: the S&P 500 was down 0.2%, the Dow was flat at down 0.04% while the Stoxx 600 fell 0.5%.

Currencies: The euro lost 0.2 %. The pound was down 0.1%.

Bonds: the 2-year was steady to close at 1.63%. The U.S. 10-year closed 2.31 % in about 3bp. The 30-year closed at 2.77 % in about 3 bp on the day. The curve flattened between 1 and 3 bp depending on the maturities. The 2/10 closed at 67.8bp, the 2/30 at 113.9 bp and the 10/30 closed at 113.90 bp.

The European 10-year benchmark closes were, gilts closed at 1.236%, bunds at 0.325% and OAT’s 0.526 %. The probability of a rate rise in December is now at 89% and a rise in June 2018 is now at 96%

Commodities: Gold fell 0.5% and WTI fell 0.2%.  Copper fell 02.1%. The fall in copper appears to be due to falling demand from China’s factories as they purchased copper and refined and manufactured the copper prior to China’s pollution laws coming into effect. Iron ore still appears to be in demand in China, despite idling of many foundries. Utilisation rates at blast furnaces is down some 71%, the lowest since 2012.

Aussie Market Today.

There is no reason for bonds to sell off just for the moment. I expect bonds to continue with the positive tone. Equities look set for another positive day although any rally will be somewhat muted.

Geopolitical tensions may increase with Trump in China and if North Korea explodes a bomb or launches a missile. Any increase in tensions will see bonds being bought.

Credit for the moment appears well bid and demand continues.

Filed under: