“WHISPER SWEET NOTHINGS,” Markets say to Trump

whisper sweet nothingsFollowing Trump’s tweet via Twitter Saturday evening, the U.S. now suddenly finds out that the North Koreans have taken Donald at face value and believe that the U.S. has declared war. This would all be too humorous if it were not so serious. Once again, Trump has unintentionally intensified an already volatile situation. One feels for the U.S. pilot who unwittingly finds their plane fired upon and then has to kill in self-defence.

Markets have taken this news in its stride and like most things about North Korea, largely forgotten. Markets reacted tacitly to Ri’s comments in the UN with the bond market rallying a few points and equities slightly off. What is intriguing about all this and it does seem somewhat conspiratorial is that North Korea’s most provocative comments are made during day time in the U.S. not during their own day time. One could believe that the North Koreans have a futures account and are trading every provocative comment.

What is interesting is the large amount of liquidity still washing through the system, and at some point in time this liquidity will cease. The Fed is cutting back $3 bio a month. However, the ECB will be buying $24bio a month (an anticipated fall from $40 bio) and the BOJ will be buying $538 bio per year. With this weight of cash, it is easy to see bond rates stalling around current levels and stocks rallying, barring some international incident. According to JPM there is an excess of $10 trillion cash in the system. (As by the measure in the difference between M2 and money supply minus implied demand target).

On the political front, Trump will be speaking Wednesday, and it is believed to be about his Tax policy. Many pundits have yet to see any policies and remain somewhat sceptical. Support for the retweaked Obama-Care Repeal Bill appears tepid and most likely to fail when presented again. There is a a lack of support from the GOP and the Democrats are unlikely to support any changes. Trump has picked a fight with the NFL and is appealing to the populists whilst alienating many key donors. The important point for the week will be the release of Trump’s tax policy and that will be key for the markets. We wait with bated breath.

Household spending for the month of August is expected to be weak and motor vehicles are expected to show a weaker trend.

Recap:

Once again tensions on the North Korean Peninsula has seen risk off trades the flavour of the hour. The S&P 500 fell 0.2%%, the Dow fell 0.2%. The Stoxx 600 advanced 0.2% the highest level since July. The MSCI All Countries Index was down 0.4%.

Currencies; The Bloomberg Dollar Spot Index rose 0.4% and the euro fell 0.9%. The pound fell 0.3%

Bonds; Bonds rallied. The U.S. treasuries generally tightened 3-4 bp and bonds in Europe tightened 3-4bp as well. The closes were U.S. treasuries 2-year 1.427%, 10 -year 2.22% in 4 bp, 30-year 2.76% in 3.5bp. The European 10-year benchmarks closed, gilts 1.327 in 3 bp, bunds 0.396% in 5 bp and OAT’s 0.693% in 4 bp. The U.S. curve tightened 2 bp between 2/10 to close 79.3bp, was in1 bp between 2/30 to close 133.4bp and was out slightly between 10/30 to close at 53.9bp.  There is a debate between NY Fed Governor Dudley and Chicago Fed Governor Evans over inflation and the Fed’s willingness to tighten. Evans has a more dovish outlook. The probability of a rate hike by December is 56.4% and in June 2018 is 79.9%. In an uncertain world, U.S. treasuries look cheap.

Commodities; WTI rose 3% the highest since April. Gold increased 1% on increased tensions and safe haven buying. Copper closed down 0.1%. Coke futures on the Dalian Exchange fell 2.4%, coking coal fell 6.5%. Spot rebar fell 1.3%, and iron ore slipped 0.2%.

Aussie Market Today.

Geopolitical risk will weigh on the markets today. Today looks likely to be a risk off day so pull on the coats and look to bonds. Equities are likely to drift lower.

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