Strange day.

Stocks edged higher with the S&P 500 eking out yet another up day to extend the rally. On thin volumes, equities rose and it was all about the possibility of a trade deal, despite sketchy details. Apple kicked the NASDAQ along whilst energy companies lifted the Dow and the S&P 500. Boeing and GE continued their falls.  GE fell 5.2% and Boeing fell 4.4%.

Stock investors appear to be waiting for the first set of earnings numbers before making any new decisions. Of the 11 major sectors, six were in the black. Volume on the exchanges was light with 6.15 bio shares trading versus a 20 average of 7.28 bio shares.

The supply of debt being auctioned this week weighed on the market. Bonds failed to attract many bids and, in thin trading, rose a couple of points in yield. Aramco is expected to issue $10 bio this week. Demand for the bonds is now in excess of 3 times overbid. Bond investors also have the U.S. consumer and producer prices this week.

Also, of interest, the Netherlands (rated AAA) is mulling the issuance of a green bond. This would be the first issue by a sovereign.

Japanese bond investors have been looking to switch out of Europe back to the U.S. As the likelihood of a recession in the U.S. wanes and as the uncertainty of Brexit weighs on European bonds, the Japanese investors have favoured U.S. bonds.

The reasons why bonds are rallying at present apart from concerns on trade are low inflation, low growth potential, and dovish central banks. Bonds look attractive under those conditions.

Elsewhere, Brexit continues to attract attention and Turkey once again made the news. Apparently, there were widespread irregularities in the local elections in Istanbul. The lira took a dive.

President Trump has been active in rejigging his inner sanctum. Not only has Nielsen gone this week but so too the Secret Service Chief Randolph Alles.

The Rant.

Buybacks are attracting a lot of attention and in the universe of U.S. stocks, the buyback has saved many an underperforming CEO’s position. It’s the oldest game in town and for a CEO it’s the easiest way to get that bonus up and tell everyone how well your stock is performing. Well, that era may be rapidly coming to an end. And somehow one could feel a little nostalgic because companies will find it tougher to engineer price rises when their company is underperforming.

So, what is happening? Since 2010, net buybacks averaged $420 bio annually. Purchases from households, mutual funds, pension funds, and offshore investors have totalled about $10 bio annually. (Data from Federal Reserve, Goldman Sachs.) Repurchases are holding the stock market together and without this demand, shares would be significantly lower. Like the central banks filling the market with liquidity, the same is happening with buybacks.

Meanwhile, there has been a chorus of critics for this practice. Senator Rubio is becoming vociferous on this issue and he too has been joined by Senator Sanders and a number of other senators from both sides of politics.

So, what does a world without buybacks look like? According to Goldman Sachs, the world would require some adjustment. Forward EPS growth would need to be trimmed 250 bp and forward price-earnings multiples would fall 1%. Buybacks bolstered EPS. According to Goldman’s, aggregate equity allocation across investors is about 44% and that ranks in the 86th percentile relative to the past 30 years. Eliminating the largest source of equity demand could lower the demand curve.

The Fed is looking to introduce a new set of risk rules for major foreign banks. The change would require significantly more capital, more stress testing and more stringent rules for capital. The banks would be subject to the same liquidity demands as the U.S. megabanks.

The foreign banks, depending upon which tier they will fill, will be required to submit living wills. Banks likely to fall into the second tier are Deutsche, Mizuho,  Credit Suisse, and Toronto Dominion amongst others.  The third tier which would have similar rules to the larger regional banks would include HSBC, UBS, and RBC. They would benefit because they would have lower capital requirements.

Market Recap.

Equities: The S&P 500 rose 0.10% while the Dow fell 0.32%.  The Vix closed at 13.18 while the Stoxx Europe 600 Index fell 0.2%.

Currencies: The Bloomberg Dollar index fell 0.2% while the euro rose 0.4%, and the pound gained 0.2%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.52% while the 2-year is trading at 2.36% and the 30-year is at 2.926%. The U.S. curve closed on the day with the following closes 2/10 at 15.8 bp, 2/30 at 56.3 bp and the 10/30 closed at 40.3 bp. The U.S. 5-year closed at 2.326% and the 2/5 spread is now -3.7 bp. The ten-year bund closed at 0.002% and the British gilt closed at 1.11% while the 10-year yen gilt is trading -0.032%.

Commodities: WTI rose 2% and Gold rose 0.5%. Copper rose 1.36% (Comex spot month).

Bitcoin is trading around $5,266.

Aussie Market Today.

With no real clear direction from offshore, the ASX is likely to drift on the day and take its lead from Asia. Asia will be driven by trade talk developments and Chinese data. Expect a day where stocks could just as easily rally or sell.

Bonds are in a holding pattern. Direction will be determined later in the week by U.S. inflation data and interest in U.S. Treasuries. Economic data will drive the Aussie bond market for the time being. Credit is better bid, the currency is stronger and the outlook looks fair. Expect a drifting day with the tone on the bonds on the bid side.