A Brewing Storm
It remains to be seen whether the brewing storm turns into a light drizzle or into a hurricane. Today Sessions was front and centre testifying about Comey, meetings he may or may not have had and the decision to fire Comey. What struck me were the evasive answers, the carefully crafted answers that answered nothing and the feigned outrage at times. Unfortunately, the problems for Trump will continue and that’s why this could blow into a nasty storm.
For Trump though his problems lie with the ability to attract anyone of calibre. Having assembled the dream team, the Administration has yet to see the passage of any Bills other than some repeals of Dodd-Frank. The Team is looking decidedly ineffective as it has found hiring the people required to draft legislation to help craft policy simply don’t want to work with Trump and his team. For most President’s staffing has never been an issue but for Trump it is and one, has to ask why it is so difficult. One must ask why with a friendly Senate and Congress why the Democrats are even needed for the passage of Bills. This, has to be a major failing.
Mnuchin once again raised the question of the debt ceiling and discussed the merits of when a U.S. Government shutdown is a desirable outcome. What concerns me and it is a major concern is how can a President be so ineffective with a Senate Majority and Congress yet has to talk about the merits of what makes a good shutdown. Clearly Mnuchin and Trump are thinking they are managing a sub investment grade company with this talk. Mnuchin of all people should know that any discussion of a shutdown would be an anathema for markets and would be a disaster. Curiously it appears the Ratings Agencies are keeping well away from the discussion which is somewhat cowardly as they would certainly be making their opinions known if say for example Italy or the U.K. were to suggest such a view. And if the U.S. were to shutdown what are the circumstances that make it a good shutdown? Watch the story because it could brew into something nasty.
On the day markets shed the technology selloff and the equity markets saw some solid gains. The Dow gained 0.44%, the S&P gained 0.45%, the Nasdaq up 0.73% and the Stoxx 600 rose 0.6%.
The pound strengthened 0.8%. The euro was flat and the Bloomberg Dollar Spot Index fell 0.2%.
Commodities were mixed. WTI futures closed 0.8% up, gold was down. Nickel fell to its lowest level in a year whilst zinc also fell. Both metals were pressured by a fall in Chinese steel prices. Zinc was down 1%, aluminium was unchanged and copper fell 1%.
Bonds were unchanged. The U.S. 10-year rose 1 bp to close 2.21%. The 2-year treasury finally awoke from its slumber and rose to 1.367%. It is expected that the Fed will raise rates Wednesday. The yield curve remained stable. The 10-year bund closed 0.26, the 10-year OAT closed at 0.6% and the 10-year gilt closed 1.025%. The big test will be if the U.S. shutdown and the ECB decides to stop buying bonds. That result could be ugly.
The Aussie Market Today
I expect that equities will rally today however commodity prices will be a factor at some point. The rally in the U.S. should provide some comfort.
Bonds will be steady however the front end could selloff in anticipation of tomorrow’s rate hike by the Fed. Otherwise the currency could sell as the interest differential closes. Watch the spreads and the currency with interest because any dovish talk by the RBA could send the Aussie significantly lower.