The signals over the weekend are best thought of as mixed. Thursday saw bonds rally and equity slightly weaker. However today we saw a reversal of that move. Bonds still remain sub 2.30% and currently closed at 2.25% yes that’s right 2.25%. The Dow was up 0.9% – so what caused the change of view?
The change of view is due to no confrontations over the weekend thus causing problems with global growth. The other main reason is that Fed rates increases for June are unlikely given the recent data releases. Housing is down, logistics are struggling, the dollar has its issues, New York manufacturing is weak and retail continues to struggle badly. Simply put equity investors are now rallying because growth is slowing and the Fed will have issues if they look to hike rates in June. It is all about growth but this time it is global growth. The U.S backed away from calling China a currency manipulator. China’s growth is really the spur for the up day today. Copper rose on the expectation of Chinese demand.
The Dollar Spot Index fell 0.2% and is the lowest since March 27. This should help exporters. The big news is that Chinese holdings of Treasuries rose in February, and Japan’s holdings are the most since October.
What is interesting though is that over the weekend we moved back to the holding pattern that we saw last year. This in my view is because of two main factors. One is the failing Trump effect. Having waited for policies and seeing the ineffectiveness of the Trump team, equities have been selling and bonds rallied. With the current play from the failing politician playbook, “let’s find a conflict” markets have rallied because there was not an escalation of geopolitical risk over the weekend and the U.S. economy is growing at a steady slow rate. Lower rates will help corporate America and low rates also mean that P/E’s once again look sustainable.
Over the next month or so Markets will be closely watching the relationships between the U.S and China and whether China will actively seek to rein in its problem child North Korea. The interplay is China and the U.S. both have to work together to avoid a massive miscalculation. On the other hand Trump it appears won’t allow North Korea to maintain its current trajectory and build a missile that could strike LA. Trump simply it appears won’t allow that.
Geopolitical risks are high and geopolitical risk will drive markets in the near term.
Aussie Market Today.
Bonds have had a good rally and so too equities over the weekend. The trend looks like a flight to low risk investments and that most likely means that bonds will hold around current levels. Equities will rally if the geopolitical risks remain constrained. The big issue is North Korea and any further ratcheting up of rhetoric should see a flight to bonds. China is showing good growth prospects and this will help Australian equities.