ARE WE RUNNING AT PAMPLONA? Are markets a bit crazy?

RUNNING BULLS PAMPLONA

The score at Pamplona was 2 – nil to the bulls. The bulls managed to gore two Americans and markets seem somewhat similar at present. Running with bulls may be dubbed by some as somewhat crazy and that’s a little how markets feel at present. Geopolitical risk if anything has increased yet markets have been more dismissive. It’s really risk baby at present.

Equity markets rallied, and some of that was based on QE unwinding, potential tax cuts, and an improving although somewhat debatable U.S. economy. Everything just seems so bullish ahead of an expected announcement by the Fed on Wednesday regarding QT (quantitative tightening). The Fed is expected to start its tapering process soon and with it will come the end of a very loose monetary policy. The Fed is expected to leave rates on hold. To date, the Fed has raised rates four times from near zero and stopped accumulating assets. Yellen suggested at a lunch that QT could start soon.

The plan is that the Fed will allow about $6bio in Treasuries to mature and raise that cap each quarter by $6 bio over twelve months and then will raise that cap by $6bio over 12 months until it reaches $30 bio. For mortgage bonds, the Fed will start at $4 bio per month and raise it in quarterly steps of $4 bio until it reaches $20 bio.

Bumps over the next few months should be expected as Central Banks find their way and as markets react to rates increasing over time. The ECB is expected to start its tapering process in January.

So, markets are really running with the bulls. Rates are for the moment steady but we should start to see a shift higher. Credit despite being tight remains an enigma. With default levels that are low according to Moody’s credit despite being tight can remain tight. If, as expected, the central banks sell government bonds, then credit is not under as much pressure allowing investors to purchase more credit bonds at higher yields in incremental steps. Thus, holding spreads somewhat tight without spreads ballooning.

In other news, there is a report that Toys R Us may be filing for bankruptcy.

Hurricane Maria has now become a category 4 storm and is heading towards Puerto Rico and perhaps the U.S. will remain in its path.

Portugal and Ireland received ratings upgrades today. Portugal is now investment grade once again at BBB-. Spreads for Portugal tightened however some believe this is overdone as Portugal is already has an investment grade from DBRS.

A Reuters poll suggested that some 10,000 jobs would be lost as a result of Brexit.

The MSCI Index of world stocks hit a high to day of 487.07

 Recap:

Equities rallied, with the S&P 500 gaining 0.1%. The Stoxx 600 gained 0.3%.

Currencies; the pound fell 0.8% after Carney reiterated that inflationary pressure may be mounting.

Bonds were relatively lacklustre given what was happening. The U.S. treasuries widened a couple of points and the yield curve steepened marginally. European bonds were slightly higher on the day. The benchmark European bond closes were gilts 1.30%, bunds 0.455% and OATS 0.726%. The U.S. treasury closes were 2-years 1.38%, 10-years 2.23% and 30-years 2.80%. The 2/10 closed 83.2bp, 2/30 closed at 140.2bp and the 10/30 closed 56.90bp. Most of the widening was between 2/10. Probability of a rate hike by December 2017 is 45.9% and June 2018 71.5%, the highest level for some time.

Commodities; oil fell marginally to close at $49.91 a barrel. Gold fell 1.1%. U.S. shale oil output is set to rise for the 10thconsecutive month spurred on by WTI at $50. Coppers slide continues as banks back away from supporting traders warehousing the commodity by way of credit lines in South Korea. Copper has slid 6% since September 8.

Aussie Market Today.

Bonds look likely to be sold again and equities look set to rally with a little prompting. Geopolitical risk as always is an issue but markets seem to be discounting any action by little Kim as just noise.

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