WHAT NOW? Cautious investors move to the sidelines

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The U.S. market is now in a rethink mode and frankly is happy to sit on the sidelines. With the Trump Administration about to release its budget and tax reform initiatives sometime next week, investors have decided to move to the sidelines. The Fed comments also will take some time to digest and as such caution is the better part of valour.

The market is looking to digest the news that another rate hike is now looking like a distinct possibility by December. The Fed will need to see some bullish data continuing to justify a hike and especially if inflation remains subdued. We have heard this all before, however if the Republicans can get the passage of their Tax Bill and budget passed then a hike will be vindicated. The outlook for markets then is a little choppy. The Vix in response fell to 9.67 which does not reflect geopolitical risk or high stock valuations.

China was downgraded by S&P to A+ citing an overheated financial market and ambitious economic targets. Whilst the banking sector could be strong credit growth is the main factor.

Mario Draghi will be speaking later this week at the European Systemic Risk Board and Theresa May meets her cabinet to see what she can give the EU as part of the Brexit negotiations.

German elections on the 24th September should see Angela Merkel returned as the German Leader.

Recap:

The S&P 500 fell 0.3%, the Dow fell 0.24% ending a nine-day streak.

Currencies; The Bloomberg Dollar Spot Index fell 0.1% and the euro rose 0.5%.

Bonds; the U.S.10-year rose 1 bp in yield to finish at 2.28% and the bund closed at 0.46% the highest level in six weeks. The probability of a rate hike in December 2017 is 60.4% and in June 2018 81.9%. What spooked the market today was that 11 of the 16 officials saw the appropriate level of Fed funds as between 1.25% and 1.5%. This is a quarter point higher than current levels. The yield curve remains flat, with 2/30 at 136.20 bp, 2/10 83.3bp and 10/30 closed at 52.70.  The U.S. 2-year closed at 1.366%, 10-year closed at 2.27% and 30 -year closed slightly better at 2.805%.

Commodities; WTI fell marginally, gold fell 1.7% and copper’s fall continued with copper falling 1.1%. Iron ore looks to be in retreat as market realities start to bite. SGX futures are now below $79.75 a tonne. How far the commodity moves will be dependent upon Chinese steel output and demand. Vale is expected to increase output over the coming months.

Aussie Market Today.

Geopolitical risk and market expectations are likely to drive markets the next few trading sessions. With the possibility of an announcement next week in the U.S. regrading budgets, this could go either way. If Trump’s team don’t deliver then the equity market may soften a little whilst bonds may become bid. Today is likely to be a squaring day with no real discernible pattern.

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