TWO RISE TODAY

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The Dow had a barnstorming day. Today’s and today’s new high, highlights the concentration of 30 securities to create an index. Of the 168 points that the Dow gained, 150 points came from the contribution of Caterpillar and 3M after they reported quarterly earnings. The Dow was up 0.74%. What a day! On the other hand, the S&P 500 which is a far broader index hardly raised a beat and finished the day up about 0.15%. Both Caterpillar and 3M topped analysts’ estimates.

The positive tone looks likely to continue as GM posted stronger than expected pretax profits to beat expectations. GM, Caterpillar, and Fiat Chrysler are all benefiting from a stronger U.S. economy and continued growth in China.

The great conundrum of the day is, ‘is the S&P 500 equivalent to purchasing a convertible bond?’. The answer may well be yes. The Dow is now offering a dividend yield of around 2%, which is comparable to a 10-year treasury (although 44 bp lower) but provides the equity upside. The S&P since March 2009 has averaged a dividend yield of about 35bp lower than the 10- year treasury. So, it’s worth thinking about even momentarily.

On a political note, the equity market has been somewhat buoyed with the prospect of looming tax cuts. This optimism may be short lived as Trump now finds himself embroiled in bitter in-party fighting. Both Jeff Flake (whom Trump describes as a light weight on his twitter account) and Bob Corker have increased tensions and heavily criticised Trump for demeaning the office of the President and his behaviour.

The reality TV role play continues. These actions are right up Trumps alley and allows Trump to use all his guile and skill to demean these Senators. The problem for the Republicans is not what Trump says or does but the fact that there are another two alienated senators that may decide to not follow the status quo in voting and further complicate attempts for tax reform.

Bonds remain twitchy. Part of that twitch is due to tax cuts possibly, some is due to improving economic conditions with the improving equity outlook and some because of the uncertainty of the Fed Chair person.  Ten-year treasuries are now back above 2.41% and if one recalls Bill Gross’s comments earlier in the year, that 10-years above 2.4% is the beginning of a bear market.

Perhaps that’s true but we will need time to prove that hypothesis. The 2-year treasuries auction was a tepid result. There was a below average bid-to-cover ratio and an above average take up by dealers. And in a straw poll of GOP senators, John Taylor looks likely to become the next Fed Chair. Ten-year treasuries were at their highest for some 5 months.

Long term inflation in Europe is seen as rising and was the reason for rises in bonds in Europe. The ECB is expected to announce possibly as soon as Thursday that it will be cutting back its monthly bond purchases. The expectation is that the ECB will cut its purchases from euro 60 bio to euro 40 bio. Rates are starting to stir.

Saudi Arabia has restated its aim to end the oil glut and cut output through an OPEC led initiative. Therefore, oil rose on the Saudi comments as well as a forecast that U.S. inventories of crude are falling.

Recap:

Equities: the S&P 500 rose 0.15%, the Dow rose 0.7% while the Stoxx 600 gained 0.36%.

Currencies: The euro rose 0.2% and the pound fell 0.6%.

Bonds: saw 2-years weaken 2bp to close at 1.589%. The U.S. 10-year closed 2.42% out 5bp while the 30-year closed at 2.935% out 4.5 bp on the day. The curve steepened 4bp. The 2/10 closed 83.2bp, 2/30 closed 134.6bp and the 10/30 closed at 51.1bp.

European benchmarks were a few  of points weaker. The 10-year benchmark closes were, gilts closed at 1.353%, bunds at 0.472% and OAT’s 0.72%.

Commodities: Gold fell 0.4% and WTI rose 1% while zinc rose 1.5% and copper rallied 0.4%. Much of the rise in copper is being attributed to a private coal mining company in Shanxi Province in China. The company has amassed a $3 bio position and that has fuelled the surge to 41/2 year highs.

Aussie Market Today.

Aussie bonds will continue to trade in a tight range. I expect bonds to trade weaker on the day as offshore bond markets weaken while equities look likely to continue the upward trend.

The issuance of bank capital hybrids will see selling in the hybrid market continue until the issues are launched. Credit remains bid in Australia as investors push for yield and income. The Ausgrid issue in Australia saw strong demand and that demand does not appear to be slowing. Ausgrid issued a 7 year bond/ FRN.

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