Sceptics Reign!

The reception of Noble Group is seen at its headquarters in Hong Kong

In a rhetorical world, the view of the sceptic is the sauce that keeps the argument flowing. Bonds did that today. Yes, bonds were a little weaker but the reason appears to be simply that bond investors are making room for the sleuth of new issuance this week. Despite good to strong data out of Europe and some good corporate earnings numbers in the U.S the bond market appears to be of the belief that the Fed may tighten in June but don’t bet on a tightening later in the year.

So why the belief? There are a number of factors at play. The most important factor is Trump’s Budget Request. Simply put it appears to be unpalatable for many Republicans and unpalatable for Democrats. At the heart of the Budget request is an under-funded Wall, significant cuts in Medicaid that includes people with disabilities (goes against earlier comments) and a major cut to Food Stamps. Food stamps are to be cut by some $193 bio and directly impacts many of Trump’s most ardent supporters. The States most affected are Mississippi, Alabama and Louisiana. The Wall is to be funded to the extent of $4 bio ($2.6 bio for new works and $1.6 bio for existing) and for many experts this is significantly lower than the real cost that is estimated to be at least $12 bio. There were a number of accounting tricks such as claiming the existing budget of $593 bio to provide resources for Defence in Iraq and Afghanistan is no longer required and this then becomes a savings. The Budget also has a savings of $35 bio in the changes in Financial Services, the Congressional Budget Office claims $14.5 bio. Government workers will have their cost of living adjustments removed provide a savings of $42bio. The Tax Policy Center believes that the Budget will add $7.2 tr to the deficit. Trump’s numbers believe that with a reduction of tax and deregulation the deficit will grow by only $2 tr. At stake is can the Budget be believed? Apparently, this Budget was delivered on a page, and the comment is that the Budget should be viewed in the prism of someone paying the bills. The Budget will be difficult to see passing easily.

According to Moody’s U.S companies have $1.8tr of cash, however for many companies they cannot see opportunities and hence are unwilling to spend cash on capex or building new factories. This is part of the problem and why we see falling productivity. As an example, Arconic (spun out of Alcoa) a specialist in metals still uses a press that was built in the 30’s and confiscated from the Nazis after WW2. They also use a 50,000 ton press in their Cleveland Plant that was built in the early 50’s. The average age of equipment in the USA currently is 10 years, compared to 7-8 years that was the average of equipment in the 60’s and 70’s.

The hedge funds have had a few large pow-wows over the past couple of weeks. At heart has been disastrous returns and what is affecting the industry. A comment really resonated, that being with all the political turmoil many of the titans of hedge funds were either clueless or disinterested. To me anecdotally this probably means many of the hedge funds are now fully algorithm based and information that is not number oriented is not processed. Hence the Funds are missing out on dispersion opportunities and when there is a number they are all heading in the same direction. Hence the majority are not making stellar returns. Also, it was interesting Anthony Scaramucci of SkyBridge Capital was opening the Las Vegas Conference. Anthony one recalls was part of the management group that sold the company to the Chinese and was at one point promised a job as Trump’s economic adviser.

Equities on the day rallied and that was primarily due to data out of Germany that indicated the German economy was strong and data out of France indicated a rise in the French economy. The U.S equity market has rallied on a good earnings season. The Dow closed, up 0.2% in a quiet trading day.

The Bloomberg Dollar Spot Index rallied 0.4%, the yen weakened 0.5% and the pound was down 0.3%. It would appear as though the bombing in Manchester was largely shrugged off.

Bonds were weaker but much of that was making way for new issuance. The 10 year, treasury closed at 2.28%. The 2-year note auction was well bid, with a bid cover ratio of 2.9! The 2-year closed at 1.316%.

Oil rose today to $51.74 a barrel. Commodities look to be under pressure however this is largely a Chinese supply demand problem. China continues to export aluminium in large amounts, zinc is a little higher. The Noble Group once a major commodities trading house is under strong pressure to survive following an S&P report suggesting that Noble was at risk of default.

The Aussie Market Today

Equities should be stronger on the day and appears to be opening that way. Bonds will be slightly weaker on the day but should see good support if the market moves too far. Credit should be steady.

The Dollar will come under a little pressure as the U.S dollar strengthens. The AUD will benefit however if there is some risk off trading given the AAA status.

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