Leadership Vacuum

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The way markets behave over the next few years could be attributed by the lack of interest the U.S. showed in global politics. Either Trump does not understand the role the U.S. plays in the world order or he does not care or he simply lacks the nous and political ability. In not having North Korea on the G 20 agenda Trump missed to opportunity to squeeze uncomfortably both the PRC and Russia. An opportunity given recent events that may be sorely rued. Trump is the disruptor but he could end up being the disruptor for the U.S.’s leadership and position in global business and affairs.

Trump appeared to lack interest in the events and seemingly sent his daughter Ivanka off to some important meetings to which she lacks the skills and understanding of the issues. I am not sure how the Republicans cannot view this as anything other than nepotism, however they are in Government so I guess they don’t care. Once again the Trump Administration showed that it cannot pay close attention to details and facts when Spicer called Xi Peng the President of Taiwan in a communique and Trump said that he would do a trade deal with the UK real fast. The only problem being the UK cannot do or agree on any trade deals until it has exited the EU.

The jobs report was out Friday and it was a ripper. About 222k jobs were added and this number was well above expectations. Once, again we had the play on numbers with Sean Spicer tweeting record jobs which is right as long as the GDP keeps growing and Pence talking about jobs growth. It is funny though that the rate of growth is not a lot different than under Obama and that wages growth is actually falling in real terms, with a growth rate around 2% when previously it had been running about 3%. Pence also weighed in on job creation for coal miners yet when one looks at the numbers the increase in numbers would fail to even be close to statistically relevant. Jobs created in the coal mining industry since its low point in August 2016 is 2000. That’s roughly 200 jobs a month. During the month Ford sacked double that number in one plant.

The world in many respects is looking to the U.S. for leadership and under Trump and his isolationist policies is changing and changing quite quickly. The U.S. may suddenly find itself on the outer. Over the weekend the EU and Canada announced a free trade agreement was closed to being started and that about 90% of the treaty was about to come into effect. For example, the cheese tariff quota would be made before September allowing 17,000 tonnes of cheese into Europe and paving the way for patent protection of pharmaceuticals in Canada.

On Friday, the Fed release a report that was suggesting liquidity was down on Treasuries but had not affected the market in a 57 page, response ahead of the next Congressional Hearing. The point being that the Volker Rule whilst causing banks to slow trading activities had not hit liquidity.  This all seems a little weird given the Fed investigated a small hedge Fund (about $4bio in size) that made great returns by taking out bond tenders much to their angst. Within the report I wonder if mention is made that the largest traders of treasuries are no longer the banks but the hedge funds and this could be a problem at some point.

On the day bonds weakened a few bp to close at 2.39% up about 2bp, the curve steepened by about 2 bp with the 2/10 closing 98.3 bp, the 2/30 closed at 152.60bp and the 10/30 closed at 54.2bp.  Central bank activity over the next few weeks will be closely monitored. the BOJ is in a fight to maintain the benchmark rate at around 0% and in Europe the bond market is looking to a beginning of the taper there to commence around September. The expectation being that instead of $40 bio of purchases per month this would slow to $20 bio and in 2018 this could stop altogether. European bonds were slightly weaker with the 10-yearbenchmarks closing slightly weaker.  The bund closed at 0.54%, the UK gilt at 1.30% and the OAT closing at 0.92%.

The yield gap between bonds and equities is slowly closing and as the gap gets closer we could see allocations away from equities. The models are currently based on low interest rates and equity dividends being attractive compared to bonds. As bond rise in yield this gap becomes more relevant and with little revenue growth for many equities this could mean a shift away. Remembering of course much of the current run in equities is due to 5 main technology stocks. If the weak economic outlook persists, then equities could revalue.

The Bloomberg Dollar Spot Index was slightly stronger rising about 0.1%.  The euro fell 0.2%.

Commodities were mixed. WTI fell 2.8% due to increased rigs in the U.S. and the persistent global glut despite attempts by OPEC to clear the glut. U.S. independent oil and gas producers were close to break even in the first quarter of 2017 thanks to aggressive cost cutting and improvements in productivity. Some producers claim they can drill profitably at $40. The Japanese reached a deal with Aramco to raise storage capacity by 30%.

Coal markets in China are bracing for government intervention as coal prices surged to the 600 yuan per tonne mark. The expectation is for prices to cool. The options markets are betting that U.S. steel makers will get a boost from tariffs. Hedge funds have started to buy zinc again after the prices plunged in May. Stocks of the metal are down and funds have moved from net short mid-June to 20% open interest. Iron ore exports to China from Port Headland (Australia) were down in June. Volumes fell from 38 million tonnes to 36.6 million tonnes.

Stocks rose with the S&P up 0.6%. The Nasdaq gained 1.1% and the Stoxx 600 fell 0.1%.

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