Today the S&P closed above 2900 and that follows on the back of strength from the tech sector after an upbeat report from Morgan Stanley. Both Amazon and Alphabet led the way.
The day was all about trade and hopes of tariff deals. Brexit played its part as a deal between the Brits and Europe became more plausible. The pound rallied, the dollar dived, rallied and emerging markets rallied and Japanese and Australian equity markets showed the world how.
And on such an auspicious day, a little loved group of biotech analysts suddenly found themselves wanted and loved and rewarded with pay upgrades with some picking up $ 3mio packages.
The key now is how long, can this nirvana last?
Within all this ongoing bliss there is, however, a dark secret. The U.S. Fed is getting ready to lift rates for a longer than expected period (much to Trump’s chagrin) and quicker than expected to insure against an expected jump in inflation. That is the message that is percolating out of the Fed.
And that message is being provided by Tetlow, a senior adviser in the Fed’s Monetary Policy Affairs Division. In his paper, Tetlow favours a more robust approach to inflation and uncertainty. Be warned, many of the Fed researchers want an acceleration of rate hikes.
Bonds did not do too much today considering the news and the bump in second quarter GDP to 4.2%. The number will require further analysis. However with higher yields, investors returned to the 7-year auction. The bid to cover ratio was the strongest since January at 2.65 and foreigners took 59.51% the lowest since March.
Direct bidders took 18.97%, the highest since December 2016. The yield curve flattened and twisted a little on the day. There is an expected $150 bio of high grade credit to be issued in September with about $40-$50 bio expected next week. This should keep the flatteners away for a little bit.
Bilateral talks with Canada began Wednesday and Trump is hoping for the talks to be finalised by Friday. Markets are cautiously optimistic that a deal can be reached. There appears to be a debate as to whether Trump is negotiating hurriedly to reach agreements with the two former NAFTA counter parties so he can then force the hand of Europe and China.
Emerging market stocks rose slightly on the day under weakening currencies. The Turkish lira fell 3%, and once again the Argentinians appear to be on the brink of collapse. The peso fell some 7% after it was announced that it was burning through reserves quicker than expected and may require IMF support again. That must make those buyers of the ultra longs a few months ago quite happy.
Equities: The S&P rose 0.57%. The Dow rose 0.23%. The Stoxx 600 rose 0.1%. The Vix closed 12.25.
Currencies: The Bloomberg Dollar Index fell 0.2%, the yen fell 0.5% and the euro added 0.1%. The Mexican peso slipped 1.7% after climbing 6% pre the release of the trade deal settlement with the U.S.
Bonds: The ten-year closed around at 2.886%. The 2-year closed at 2.682% and the 30-year closed at 3.023%. The ten-year bund closed at 0.406% and the OAT closed at 0.738%. The U.S. curve closed on the day with the following closes 2/10 at 20.7 bp, 2/30 at 34.4 bp and the 10/30 closed at 13.5bp. The U.S. 5-year closed at 2.784%.
Commodities: WTI rose 1.7%. Gold was fell 0.2%.
Bitcoin is trading around $7042.
Aussie Market Today.
The lead for the equity market will come from Asia. However, given offshore movements, expect the equity market to be slightly stronger.
Bonds should hover as investors look for direction. With optimism rising for trade talks and with a whiff of optimism, bonds could see some selling pressure. They have had a good run this month so a little profit taking should not be unexpected.