Who’s Afraid Now?

Equity markets appear to be shrugging off all the rhetoric relating to trade and powering ahead. Showing little fear that Trump’s comments could spiral into a full on trade war, equity traders in the U.S. are happy to consider their purchases on earnings growth. It would appear many analysts, whilst fearing the earnings won’t be repeated, are happy to believe that with rates low and inflation benign the economy can continue to rally.

For bond traders, they have to be more sober. With an expected deluge in issuance of $239 bio between now and October and mostly in bills, the bond market is expected to come under pressure from time to time. Once again this week, there will be $ 26 bio in 10-year debt $18 bio in 30 years. It is also auctioning $51 bio in 3 month bills and $45 bio in 6 month bills. The Government is expected to need to borrow $56 bio in the third quarter.

Demand is expected to continue despite the increase in government IOUs largely because tariff threats will take time to bite.  As long as the economy hums along and bond rates remain higher than many of its peers, there is an attraction for owning treasuries.

However, bond rates rallied a little today and that was largely in response to the increase in rhetoric between China and the U.S. There is an interesting game going on, with fund managers building positions every time the 3% level for 10-years is reached and speculators have reached all time peaks for net shorts on 5-year and 10-year treasury futures. Bizarrely, high yield remains well bid due to a lack of issuance.

German industrial orders fell 4% in June, no doubt affected by tariff concerns. The fall was the steepest monthly drop in nearly a year and a half. And it appears as though Chinese exports have held up with little impact caused by the $34 bio of tariffs implemented on July 6. Imports are expected to rise.

Market Recap.

Equities: The S&P rose 0.4%, the Dow rose 0.16% while the Stoxx 600 fell 0.1%.  Vix closed 11.27.

Currencies: The Bloomberg Dollar Index rose 0.2% and the pound fell 0.5%.

Bonds: The ten-year closed around at 2.945%. The 2-year closed at 2.649% and the 30-year closed at 3.093%. The ten-year bund closed at 0.39% and the UK gilt closed at 1.30% and the OAT closed at 0.714%. The U.S. curve closed the day with the following closes 2/10 at 29 bp, 2/30 at 44 bp and the 10/30 closed at 14.8 bp. The U.S. 5-year closed at 2.809%.

Commodities: WTI rose 0.5% while Gold fell 0.7%.  The Bloomberg Commodity Index fell 0.2%.

Bitcoin is trading around $6870.

Aussie Market Today.

Equity markets should strengthen on the day. Bonds should also rally on the day as concerns over tariffs mount. Watch the Chinese market for a better lead. The Composite Shanghai 300 fell some 1.25% Monday and is now down 18.75%.  Credit was a little better overnight so expect some possible movement there.

The Aussie dollar looks to be under pressure.  However, the relief valve remains in the form of bond rates.

Geopolitical risks remain high.