A Wild Ride Perhaps?

What is there to say about the day? Well, it was rather interesting to say the least. We had a missive fired by Trump at one of his favourite characters, Fed Chairman Powell. Trump suggested that the Fed should be easing rates below zero. Then with Bolton’s departure, we discover that Trump was looking to meet with the Iranian President Hassan Rouhani. How the world has changed and how the world will change should Trump reach any sort of agreement. Importantly, how will both Israel and Saudi Arabia feel about such a meeting and does this indicate some freezing of relations? All to be revealed over the coming months.

The upshot of the day’s trading was that oil fell because Trump indicated that sanctions on Iran could be eased. The Nasdaq rallied as investors continue to rotate out of momentum shares into value shares. Meanwhile, China has moved to lessen the trade war by exempting a number of goods that had levies imposed last year. Equity investors saw positive movements in 10 of the 11 major sectors. The only laggard was real estate. The Philadelphia SE Semiconductor Index was up 1.5%. Volume on the exchanges was above average with  7.59 mio shares trading versus an average of 6.85 mio over the last 20 days.

The market is set for a wild ride. If we get a trade deal combined with a dovish Fed, lower interest rates and consistent valuations then the recipe is there for a large market move. Equities in Europe rallied on hopes of fresh monetary stimulus from the ECB come Thursday.

For fixed-income investors the outlook is a little confusing. If an agreement is reached on a trade, then the concerns about global recession ease. However, what investors do not want to see is a Fed whose strategy is influenced by the President via Twitter. The sentiment is changing and that may mean bonds see further yield increases over time. However, the caveat as always trades, nothing else matters. If the Fed were to ease to zero or below that level of rates would be consistent with an economy in recession and that is probably the last thing Trump should want. The 10-year auction was marginally weaker than expected however the bid to cover ratio was a solid 2.46. This probably indicates demand for the 10-year at current levels.

Trump’s desire for negative rates is somewhat confused. Perhaps Trump feels that corporates will borrow more and invest more with rates at such a level. The experience in Europe is very different. The ECB is still cutting and has been cutting since 2014. The ECB has had to contend with disinflation and low growth and to date, negative interest rates have not boosted either prices or output.

Japan has also seen little return for their level of negative rates. The general experience across Sweden, Denmark, and Switzerland have been that not a lot of benefit has been derived. Inflation has remained stagnant and low, growth has been muted and the economies have not shown any signs of growth other than very weak growth.

Market Recap.

Equities: The S&P 500 rose 0.72% The Dow rose 0.85%. The Vix closed at 14.61. The Stoxx was up 0.85%.

Currencies: The Bloomberg Dollar Spot Index rose by 0.2%.

Bonds: (as at 4.30pm). The ten-year is trading at 1.744%. The 2-year is trading at 1.679% and the 30-year is at 2.225%. The U.S. curve closed on the day with the following closes 2/10 at 6.3 bp, 2/30 at 54.5 bp and the 10/30 closed at 47.9 bp. The U.S. 5-year closed at 1.602%. The 2/5 spread is now -8.3 bp. The ten-year bund closed at -0.563% and the British gilt closed at 0.64%. The 10-year yen gilt is trading -0.205%. The 10-year OAT (France) closed at -0.261 and the Italian 10-year bond (BTP) is now trading at 0.945% and the 30-year at 2.089%.

Commodities: WTI fell by 2.4%. Gold rallied 0.8%.

Bitcoin is trading around $10,136

Aussie Market Today.

The stock rally looks likely to continue. What can go wrong? Stocks for the moment are in a healthy space as investors look to a possible trade deal between China and the U.S. The outlook is positive. A further rate cut will send equities higher.

Bonds should be steady on the day. Look for consolidation at current levels. A small amount of drift may occur, and this is possibly a signal to add.

Credit continues to tighten as the equity market rallies.  Demand for quality issues ex banks remains strong.

Geopolitical risks remain high and still need to be monitored. Watch developments out of Hong Kong as the protests have a real chance of upsetting sentiment in the region. Watch for a tweet on trade or comment on trade out of China, either commentary will have the ability to move markets.