After a hectic week of sabre rattling by Trump the weekend saw a reversal with senior aides scrambling to settle the volatile situation. Mattis and Tillerson crafted a response that for the moment appears to have defused the situation whilst the top army brass has visited South Korea, Japan and will visit China to say that Trump did not mean what he said. It was all a joke. But then again when anything Trump says goes sour it is a joke. I hope lil’ Kim is listening and agrees it’s all a joke.
From the moment Tillerson said nothing was meant by the Trump rattle, markets looked to the sell off as a buying opportunity and sold risk off assets to a limited extent to purchase more risky assets, i.e. equities. Looking ahead though, the relationship with South Korea is a little testy and that’s understandable as Trump almost put Seoul in the firing line.
However apart from the quenching of the fire that Trump started, markets looked to some very positive economic developments. Japanese growth stormed ahead in the June quarter posting a 1% gain. Eurozone factory output slid and appears to be indicating a flattening of eurozone growth. The Vix had a big move on the day falling some 20%, one of the largest movements for some time.
Commodities saw some retracements. Nickel and zinc fell on pressure from falling Chinese steel prices. Chinese property slowdown appears to be having an impact on some commodity prices. Slowing Chinese Housing sales and cooling market are affecting steel prices. Zinc was down 0.9% and rebar fell 3%. Copper fell 1%.
WTI fell 2.7% to close at $47.50 a barrel. Gold fell 0.5% as tensions eased.
Equity markets rallied on the day as risk on trades were placed. The S&P rose 1%, the Dow added 0.6% and the Nasdaq rose 1.3%. The Stoxx 600 rose 1.1%.
The Bloomberg Spot Dollar Index gained 0.3% while the euro lost 0.3%. The pound slipped 0.4% on Brexit fears once again.
The bonds were the victim of the risk on trades. The U.S. 10-year rose about 3 bp to close 2.22%, the 2-year note rose a similar amount to close 1.32%. Bonds in the eurozone weakened a similar amount with the UK 10-year closing 1 bp higher at 1.07%, the OAT closed at 0.7% up 3bp and the bund closed at 0.4% up a similar amount.
The U.S. curve was pretty steady with the 2/30 closing 148.5bp, the 2/10 closing 89.6bp and the 10/30 closing at 58.7bp. The bond market has somewhat mixed feelings about the future. The probability of a rate hike as expressed in the Fed Fund Futures has a rate hike probability of 32% in December. New York Fed Governor Dudley muddied those waters today by suggesting the Fed could hike again this year. We would need to see some stronger data perhaps to sway the bond markets view.
In developing news, it appears as though Canada is having a hard look at the NAFTA Agreement that Trump is wishing to have rewritten. Canada has suggested that it may withdraw from NAFTA.
Aussie Market Today
As geopolitical tensions have waned expect the equity market to have a solid day and bonds to sell off. Lower commodity prices could impact the resource sector whilst banks should remain pretty solid.