Slip Slidin Away, You Know The More You Get Closer To…..
And that’s the way the traders on bull Trump trade feel and those who felt that Trump could deliver. To date the only successful thing that Trump has done is raise the geopolitical stakes. What he hasn’t done to date is deliver a policy on trade, we have yet to see his much vaunted tax cuts, nor see Obama Care repealed. We have seen his own Party rebel against his initiatives. Trump has not labeled China a currency manipulator as promised rather he has befriended China, with a deal that probably will upset his core voters. The price of coal has not risen so those miners who felt that Trump would somehow get their jobs back will feel duped. Simply put coal cannot rise significantly because natural gas is too cheap and not many countries want coal.
Attention is now firmly focused on the corporate reporting season. Tomorrow (Thursday) Citibank and JPM will report their earnings. Bank stocks fell as a result of Trump’s comment that the Dollar was too strong raising fears that pressure could be on the Fed to hold rates steady. Trump also left the door open to not replace Yellen as the Fed Chair. Volatility rose again with the Vix up to 14.13. The Dow was down 0.29%. It was also suggested that the back track by Trump was to appease the Chinese and reduce the risk of China dumping U.S. treasuries which would pressure U.S. interest rates and place any acceleration of the economy in jeopardy.
Traders on the day have looked towards safe haven trades or risk off trades. Gold was stronger, the Dollar was stronger and bonds rallied. The US 10 year Treasury is now trading at 2.24%. The yield curve flattened a couple of points. The 2/10 spread is 103.30, the 2/30 is 168 and the 10/30 is 64.50bp. On the day base metals were generally softer. The 10 year German Bund was stronger closing at 0.2%. West Texas crude was down slightly to close at 52.89. Note that trucking and freight charges appear to be waning and this does not auger well for U.S. economic growth if the trend continues.
The outlying risk for the markets could be Italy. Italy stands to lose significantly if Le Pen wins. So far we have seen French assets being sold but that is the mere tip of the iceberg. The story could be Italy. The Italian 10 year is now 2.29% and I looking increasingly shaky. So why should we be worried about an Italian fallout? Italy does its borrowings through the ECB and the ECB has been responsible for Italian rates remaining relatively low. Should the ECB cut its bond buying program Italy could have issues keeping rates relatively low. Italy has significant problems that won’t be easy to fix. With weak growth, a banking sector with something like 1/3 of all bad European loans, a very weak banking sector and public debt that is ballooning. The fear is that if Le Pen wins then Italian spreads would balloon. Italy is also due for parliamentary elections late this year or early next year and is not without its own populist movement who are anti-euro. The worry is that without the ECB maintaining relatively low rates in Italy a change or a breakup of the euro would see Italian rates spiral upwards and quickly potentially bankrupt Italy.
Aussie Market Today.
Bonds rallied and I expect that trend to continue over the day with some squaring towards the end of the day’s trading. The market should be quiet and will probably be choppy.
Equities will be slightly weak on the day however expect a slight improvement into the close as traders square positions ahead of the Easter and Passover weekend.