ALL QUIET ON THE WESTERN FRONT Markets remain quiet

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They say the good Lord giveth and taketh away and in this instance the good Lord did not a lot. Markets were generally quiet as investors looked towards Trump’s policies and found very little detail and were left somewhat reluctant to do much. As a result, the U.S. dollar sold, while bonds were steady and equities rallied a little.

Data on the U.S. economy was a little stronger than expected but momentum is expected to slow because of the impact of Hurricanes Irma and Harvey. Markets are likely to remain languid for some time until some detail on the tax plan is released. It is highly likely that any successful passage will require time and likely to extend into 2018.

The bond market is also a little concerned over Trump’s plan and the yield curve steepened a little today, out by 2bp.  However, with scant detail the market looks to be fair value at present. The real concern however is over the impact of Trump’s plan on the deficit. If Trump is successful the deficit is likely to blow out considerably and bonds will adjust quickly and dramatically (sold).

Recap:

Equities: The S&P 500 rose 0.1%, the Stoxx 600 rose 0.2% and the MSCI All-Country Index rose 0.2%. The Dow was also up 0.18%

Currencies: The Bloomberg Dollar Spot Index fell 0.2% and the euro rose 0.3%.

Bonds: Bonds were steady with a slight steepening of the yield curve. The closes were U.S. treasuries 2-year 1.455% -2 bp, 10 -year 2.309%, 30-year 2.869% +1 bp. The European 10-year benchmarks closed, gilts 1.38, bunds 0.481% + 1 bp and OAT’s 0.766% +1 bp. The U.S. curve steepened. The closes are 2/10 to close 85.4bp 1.8bp, between 2/30 to close 141.6bp +2.8bp and 10/30 to close at 56.1bp +1bp.  The probability of a rate hike by December is 62.8% and in June 2018 is 84.1%.

Commodities: WTI fell 1.0% s Gold rose 0.3%.  Copper advanced 1.6%. Import growth in China for copper has slowed from 28% last year to just 3%. China’s steel mills are slashing order books as they attempt to comply with Winter Regulations to control pollution. Mills in Northern China are expected to face up to 50% cuts to output. To offset production cuts Chinese Mills have been increasing production ahead of an expected slowdown in output. Demand for iron ore could slump 8%.

Aussie Market Today:

The market today is likely to be relatively quiet ahead of long weekends in both Melbourne and Sydney. Bonds to probably close a little better after a soft few days and equities to soften a touch as books are squared. Expect a quiet day with Melbourne off to the AFL march.

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