JERUSALEM

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Today is a momentous day for a major portion of Trump’s voting base. Trump honoured his election pledge and has moved to enact the Jerusalem Embassy Act of 1995. In a bold move and increasing frustration with his Security Advisers, Trump decided to declare that he would move the embassy from Tel Aviv to Jerusalem.

This is a bold move because it clearly jeopardises the two-state solution in Israel, and alienates a number of key Muslim allies. Saudi Arabia will be fuming as the move just across its influence and prestige in the area. The Russians and Iran will be most likely the big winners here.

For markets, this will have little impact for the moment. And to be fair markets have reacted with not so much as whimper. However, the Middle East is a powder keg, and anything can happen. This announcement is certainly a recruiting drive for IS and will make it difficult for the Saudis to influence those extreme elements that it has influence over globally.

For the European allies, the announcement was treated with dismay. For Trump, the key will be holding everything together. He feels that he can and that this simple move will have little impact in gaining agreement for a lasting peace in the region.  If Trump can pull it off, he should get the Nobel Peace Prize because it is a very bold move.

Markets in general though took the lead from Asia today. In the case of bonds, the trend was to rally and in equities, they bounced along rallying at times and selling at other times. Bitcoin breached 13,000. It was only 9,000 a week or two ago. Oil pricing tumbled as gasoline inventories exceeded expectations and what also looked like profit taking.

A sell off in equities earlier in the day was linked to oil and that all good news about the tax reform was factored into the equation. Technology stocks were sold again with the root cause being high valuations. U.S. unit labour costs were weaker than expected and have declined in both the second and third quarter this year. The report suggests that inflation will remain weak for some time. Unit labor costs fell 0.2% annualised instead of rising. Expectations were for labor costs to rise 0.5% for the period.

Bonds rallied as a result. The yield curve continues to flatten and the pricing of 3 rate hikes appears to have been pushed further out. To obtain a print above 2% for Fed Funds the futures have 2% being breached in June 2020. The probability of a rate hike in December remains at 96.2%.

The focus for many though is assessing the U.S. tax reform developments and the wrangling over the GOP’s plan on avoiding the December 8 shutdown as infighting has become a major issue. For the fiscal hawks, this will only be a minor confrontation before some major confrontations occur because if Trump does not get his 4% -6% growth as claimed the revenues will lag and the deficit will blow out even faster.

In a signal to the U.S. lawmakers, S&P have indicated that the proposed U.S. tax cuts could impact on the AAA rating and that a downgrade was possible. S&P cited increasing deficits and looser fiscal policy as the concern. A downgrade could impact on the government’s cost of debt and cause bonds to push higher than expected. Kraemer, the Global Chief Ratings Officer, argued that those parties using the Laffer Curve would be disappointed. The Laffer Curve has not been successful in practice and is unlikely to work with an economy already at full capacity. Kraemer is somewhat disappointed that the Government is not building a buffer for when the next recession inevitably hits.

And to demonstrate just how much technology is coming into everyday life, Barrick Mining is overhauling its operations and seeking artificial intelligence experts to assist the company to build robot run mining operations, exploration for new leases, and overseeing projects.

 

Recap:

Equities: The S&P 500 rose 0.1%. The Dow fell 0.11% and the Nasdaq rose 0.15% The Stoxx 600 fell 0.1%.

Currencies: The Bloomberg Dollar Spot Index rose 0.3%. The yen rose 0.3%.

Bonds: The 2-year closed at 1.80%. The U.S. 10-year closed at 2.32%. The 30-year closed at 2.71 %. The 2/10 closed at 52, the 2/30 at 90.9 bp and the 10/30 closed at 38.8bp. The European 10-year benchmark closes were, gilts closed at 1.23%, bunds at 0.30% and OAT’s 0.61%.

Commodities: Gold fell 0.1% and WTI fell 2.9%. Copper regained 0.6%

Aussie Market Today.

Asia led the charge into yesterday’s session. However today, the region’s bond markets will most likely take the lead from the U.S. market. The rally should continue for a little while yet. There may be a push because geopolitical tensions will now rapidly rise unless Trump can massage his allies’ rhetoric and assuage fears. For Australia the weakening economy suggests a fall in the dollar and a rally in interest rates.

Equities will be mixed. Given the recent fall in commodities, the miners will most likely lose some ground. Overall, the trend should be to fall a little on the day.

Credit remains in demand as investors hunt for returns.

Geopolitical tensions are once again rising albeit slowly at this stage.

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