Today was a little bit like the Black Friday Sale and investors gorged on cheap stocks. Neither the outlook for the midterms nor the uncertainty of the crooked path to tariff redemption could dampen buyers’ enthusiasm. Financials and energy climbed whilst tech weighed on stocks.
Tech underperformed. The tech sector is now down 6% since the beginning of September. A number of speed humps are still in the way. Kudlow downplayed the potential of a quick deal. Trump wants a deal but won’t get one and Trump is saying just about anything so that the GOP is re-elected. And that’s the noise that is now affecting markets. It’s the political comment designed to grab a headline and that is keeping markets on edge.
Yesterday, President Xi spoke at a trade convention and whilst not directly criticising Trump by name he certainly put out a call for free trade. For Trump backers, the evidence against China is there for all to see. The trade gap is now at $300 bio, that’s 10% wider than last year and three times the deficit with Europe and six times that of Japan.
Trump wants the Chinese Government to stop subsidising robotics, other high tech industries and the slogan “Made in China”. Unfortunately this won’t happen as Xi is wedded to continuing with what is already in place.
And if you thought this was a relatively bad period in markets, then your guess is correct. According to Deutsche Bank Strategist a huge 89% of assets have lost money in terms of the dollar. The Stoxx has lost 10%, cash is the winning asset and U.S. treasuries are up 1.4%.
The way the year is headed investors will have wins in just two classes, cash and oil. Treasuries and credit still remain green. The year 2018 looks set to deliver the lowest share of positive returns across 17 asset classes since 2008.
These returns are so numbing because in 2008 we had an equity market that was shedding points quicker than you could say the number, a financial crisis and Governments shoring up the banking system. Today, we have wads of cash. Yes, the central banks have stopped their QE or are slowing their purchases but nonetheless the market has lots of liquidity and in the case of the U.S., a boost from a massive tax cut.
We fail to appreciate that the weakness should not be happening.
Maybe this can change. Possibly November 6, the day that the U.S. electorate goes to the midterms, will see a change in fortune. The three-year auction today was soft. Dealers and select institutions bought 3%, the lowest share for 9-years.The decline in offshore investors continues as hedging costs continue to rise. And some are warning that direct bidders could disappear from bidding in the longer dated auctions.
The polling data has the GOP winning the Senate and the Democrats the lower House. In my view, we could be in for a big surprise. Certainly Trump is luring support by saying he expects a trade deal with China. And the economic refugee march through Mexico by those seeking a better life plays into the hands of Trump’s construct of the border wall and South Americans being dangerous.
If there was any flagging support in the lower states, the marchers empowered Trump. Voters are expected to come out in record numbers and Trump being Trump, he can be quite divisive. However, I think he will surprise. The Democrat campaign appears to have overplayed its hand and has enraged many GOP supporters especially since the episode with Kavanaugh occurred. What the Judge had to endure was seen as highly political.
Today is a big day for Iran. The sanctions imposed by the U.S. are once again applied. The U.S. has granted exemptions to China, India, Greece Italy, Taiwan, Japan, Turkey and South Korea allowing them to purchase Iranian oil. Meanwhile, both the Russians and the Saudis have increased production.
Equities: The S&P rose 0.6%. The Dow rose 0.8%. The Stoxx fell 0.2%. The Vix closed at 19.77.
Currencies: The Bloomberg Dollar Index fell 0.1%. The pound jumped 0.6%. The euro was up 0.3%.
Bonds: The ten-year closed around at 3.201%. The 2-year closed at 2.912%. The 30-year closed at 3.434%. The ten-year bund closed at 0.424%. The OAT closed at 0.79%. The U.S. curve closed on the day with the following closes 2/10 at 28.7 bp, 2/30 at 52.1 bp and the 10/30 closed at 23.2 bp. The U.S. 5-year closed at 3.028%.
Commodities: WTI rose 0.5%. Gold fell 0.2%. Copper fell 1.9% on what appears to be profit taking.
Bitcoin is trading at around U$6,384.
Aussie Market Today.
Equities should rise today but with the mid-term results in the U.S. due tomorrow, some investors may hold back. The direction will be set by Asia.
Bonds should be steady on the day. A little retracement in the U.S. gives some hope. The RBA meets today and there is talk of a cut in the offing given the demise of housing market. Any comments will set the bond market up for a rally, especially in the front of the curve. Around 2 pm we may well see a pause whilst waiting for commentary at 2.30 pm.
Any talk of an easing today will see the Aussie fall. Meanwhile, the Aussie is trading up on a talk of tariff reductions and trade tensions easing. Nothing has happened except speculation. The Aussie could become quite volatile shortly.