Strange Days Ahead

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Strange Days Ahead.

Well the world just got a little weirder and once again the imprimatur was courtesy of the U.S. President and the demise of James Comey as FBI Head. Why does this matter? or why should it matter or affect the U.S. markets is beyond me but it did.

Comey’s demise upset markets because it was unexpected and also because it says something about the Administration in that from an outsiders’ point of view it raises more questions than answers. It appears as though the Trump Administration has something to hide especially when viewed through the virtuous prism. Comey came unstuck because he asked for more funding to fund the FBI probe into the allegations of Russian interference. The Republicans are now mounting a rear guard action, but this is only window dressing.  If Trump felt so strongly early on why did he not fire Comey, after-all he would then have had the backing of the Democrats.

The upshot of the firing of Comey is that once again it shows that the Trump Administration is not that decisive or is ineffective. If Trump is to be believed – then why so long. What the action does do now is polarise factions within the Republicans and create enmity with the Democrats. Partisan lines have now been drawn and this will make the task of pushing through any Bills even more difficult than it already needs to be. The immediate problems will be the Budget and the repeal of Obama Care to be replaced by Trump Care. Everything has now been sidelined, what was a distraction is now a fulcrum for investigation and answers something the Trump Administration won’t be pleased about. This does add uncertainty it adds confusion about tax reform and healthcare reform. What it does do is make the task of Government harder and for the Republicans this could be a disaster. There is nothing worse than voting for a Party and then finding when they hold the majority Bills still cannot be passed.

Uncertainty or rather the stakes of uncertainty have been raised and for the moment markets are sitting back and observing. At some point the promises will no longer hold weight and then we will see a correction.

On the day equities were mixed. The S&P and Nasdaq broke a record high and the Dow slipped about 0.2%. The quote of the day no doubt went to Robert Kaplan the Reserve Bank of Dallas President Robert Kaplan (usually a hawk) when he suggested that the pace of rate hikes may not happen as quickly. No doubt Kaplan is seeing the lack of progress in tax reform, infrastructure spend and repeal of Obamacare as being a brake on the economy and therefore growth won’t be as rapid. The Trade Secretary Ross, also cast doubt on growth by saying that 3% was not achievable this year because of the lack of progress of Trump’s initiatives. As we have been saying for a little while growth at 2% and with a country at near if not full employment without significant gains in productivity increased growth rates will be difficult to achieve.

Oil rallied today, rising some 4%. WTI jumped 3.4%. The rise was attributed to falling stockpiles in the U.S. This is currently a supply demand equation. The long term outlook is that the overhang from earlier production won’t ease quickly and world growth needs to pick up. Copper had a bad day. Copper fell on the back of weak Chinese data and was down 0.1% on the day but down some 5.1% for the week. Gold rose 0.2% on geopolitical fears as once again the North Korean Government looks to test the U.S. Government with the rumour of a nuclear test.

The Treasury 10 year note auction was held today. Demand was soft and it would appear as though investors are waiting for slightly higher levels. The 10 year bond closed around 2.41%. Bunds rallied with the 10 year falling 1 bp. The French 10 year closed at 0.84%. The U.S. curve barely moved. The closing spreads were, 2/10 closed at 105.10, the 10/30 closed at 62.50 and the 2/30 closed at 168.20

Aussie Market Today.

The weak Chinese data could have an impact on the Aussie equity market today. Commodities are generally weak and this will impact the resilience of the current prices. Banks perceivably will remain under a little pressure due to the new Government levy.  The state of the Chinese economy has a profound effect on our market and needs to be watched. Fortescue raised some money last night. After surviving a near death experience in 2015, Fortescue came to the market looking for $1 bio but left with $1.5bio. The raising was split into 2 tranches with $750 in each. The 5 year tranche was issued with a coupon of 4.75% about 2.75% over 5 year swap and the 7 year tranche had a coupon of 5.125% which equates to a similar spread.  The bond’s debt programme was rated BB. The issue was completed via a 144A placement. Spreads in the junk bond sector in the US have tightened considerably with a well-regarded BB issuer now trading around 232 over treasuries. These movements should allow credit in Australia to continue to tighten.

Bonds will be slightly weaker on the day. This view is based more on the fact that markets are quiet and in quiet markets securities tend to drift and usually they drift weaker.

The currency is on a slide at present. Weak commodity prices are the driver. Lower copper and iron ore prices are certainly being felt. The domestic economy appears to be weakening and this will further hurt the Aussie dollar.

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