It is easy to understand why Trump wanted the Fed to ease by more than 25bp because he knew that he was about to ask the U.S. economy to take some bad medicine. Bad medicine is what the economy got. And that medicine was in the form of yet another 10% hike in tariffs on another $300 bio of Chinese imports to commence in September. This tariff stuff appears to be far more effective than the IRS however the downside is that the U.S. economy could falter and especially so if manufacturing stalls. The agricultural sector has slowed significantly, and that malaise is spreading.
The aftermath was a somewhat of a rout and especially so for the short treasury traders who would have been busy squaring their books Wednesday. The obscenities would be flying. We will come to them later.
Equities well they took their medicine not at all well. Stocks were down across the boards at least 1% and the S&P on the day had a 2% swing. Lenders led the downward path with B of A leading the fall. Global companies slumped. Caterpillar, Nike Inc and Apple all had a lamentable day as the draft list of Trump’s tariffs included consumer and technology goods, toys, footwear and clothing. The tariffs come in addition to the 25% on $250 bio that is already in place.
The MSCI gauge of stocks from across the globe has shed 0.72% on the day after rising 0.52% earlier in the day. Of the 11 major sectors eight closed in negative territory. Volume on the U.S. exchanges was large with some 9.89 bio shares compared to the 20-day moving average of 6.48 bio shares per day.
U.S. treasuries took Trump’s siren call with great aplomb and rallied with 10-year bonds tumbling to the lowest level since November 2016 and recorded their steepest one day fall since 29 May 2018. The short end futures traders are back on the easing trade again with a 73% chance of a rate cut again in September. Payrolls are due tomorrow but will probably have little impact on markets at present. The main focus is trade and the latest round of announced tariff hikes will affect markets over the coming days.
Powell took his insurance cue from Greenspan and at the time that insurance was effective. Maybe lightning can strike in the same place twice.
The evidence is mounting that Trump is using the Fed to pressure China. Powell said in his statement Wednesday that the rate cut was justified because of trade tensions and the President the next day created more tensions.
The only problem with all these actions is that markets become somewhat immune to the tensions and immediately factor in a rate cut. Markets believe and react as if central banks will keep easing to prevent a recession whilst the real problem trade is not being solved. The easing approach is a mere band-aid across a gaping wound and does not prevent an economy from slowing. All one has to do is look at Europe or the U.S. with interest rates where they are, and fears of recession still continue unabated.
And what if China walks away and takes a long-term approach and tries to ride out the storm. The belt and roads project may yet provide a major dividend when the U.S. economy is faltering the Chinese economy could find itself on an upward trajectory.
Trade wars are not easy to win and the real impact has yet to be felt in the U.S. economy.
Equities: The S&P 500 fell 0.9% The Dow fell 1.05%. The Vix closed at 17.87. The Stoxx Europe 600 Index rose 0.2%.
Currencies: The euro fell 0.7%. The Bloomberg Dollar Spot Index rose 0.4%. The pound was flat.
Bonds: (as at 4.30pm). The ten-year is trading at 1.899%. The 2-year is trading at 1.738% and the 30-year is at 2.449%. The U.S. curve closed on the day with the following closes 2/10 at 15.7bp, 2/30 at 70.6 bp and the 10/30 closed at 54.7 bp. The U.S. 5-year closed at 1.693%. The 2/5 spread is now -5.3 bp. The ten-year bund closed at -0.491% and the British gilt closed at 0.589%. The 10-year yen gilt is trading -0.131%. The 10-year OAT (France) is now -0.187.
Commodities: WTI fell 7.9% the biggest decline since February 2015. Gold rose 1.2%.
Bitcoin is trading around $10,422.
Aussie Market Today.
Stocks should be weak on the day. Trade and offshore weakness will play on investors minds and probably lead to further falls.
Bonds should rally. Bonds rallied in offshore markets and the trade tariff announcement has just seen investors reset and move back to risk off mode. The trade tariff announcement has the possibility of hurting the Chinese economy and any slowdown there will have an impact domestically with real fears of recession arising.
Credit was a little wider overnight and will probably be a little less bid with the equity sell off. Australian credits still look cheap on the International stage, but currency remains a slight risk. On the day the Aussie is now under 68c.
At least one more rate cut is now expected.
Credit continues to perform.
Geopolitical risks remain high and still need to be monitored.