Friday was a day most peculiar and peculiar for a number of reasons. On a typical day when equities have a significant rally, bonds go into risk-off mode and sell. The S&P 500 rallied 1% and bonds weakened a basis point.
What is it that bonds either forgot about or know that the stock market does not? It may be that bonds have become immune to trade talk and stocks have not. Or it may be that if bonds don’t expect any tightening of rates soon and are looking for an easing, and that may well be the reason.
Over the weekend, Pence and Trump seemed to enjoy the repartee of chastising their allies and focussing inwardly. On Friday, Europe thought that a trade agreement between the U.S and China could be a possibility. What they learned by Sunday was that Europe was now the new foe.
It appears as though Trump has a document to be signed where the bottom line is U.S. automakers are to be listed as a national interest and that means Trump can hike tariffs significantly. For Germany and Japan, this is something to despair if true.
Stocks rallied on Friday simply because stock traders heard the positive news from the Trump administration that a trade deal with China was close. Investors jumped on the news and rallied stocks. The reaction towards Trump’s wall was, however, muted. The announcement of a national emergency fell on deaf ears, or simply no one cared. The main thing is a government shutdown could now be avoided and that would be good for consumer sentiment and retail trade.
For many, the critical data over the next few weeks will be factory activity. Trade tensions are weighing on the data with some central bankers making specific comments. The BoE’s Carney believes that growth was slowing and this was in part assisted by central banks normalising their operations.
For the Europeans, the trade news was a catalyst to rally European stocks. Banks and miners rose. However, it will be interesting to see how the European exchange handles the next few days as the U.S. exchanges are closed Monday. The Europeans will be reacting to their views relating to U.S. national interests and the likely imposition of tariffs on European goods. Suddenly, the Europeans are trade villains.
In other news, U.S. student debt has hit a new high with those in arrears. Serious delinquencies on loans now total $116 bio and this means federal deficits will rise with that increase in delinquencies.
Why is this important? A significant portion of the population is struggling with debt even into middle age. This, therefore, reduces their ability to spend, thus, slowing the economy. People aged between 40-49 are the most affected group. College education costs are not offsetting the opportunities provided by having a college degree. The cost of education has doubled over the last 20 years and the problems are set to worsen.
Equities: The S&P 500 rose 1.09% and the Dow rose 1.74%. The Vix closed at 14.91 while the Stoxx gained 1.4%.
Currencies: The Bloomberg Dollar index fell 0.2%, while the euro remained flat. The pound gained 0.7% and the yen rose 0.1%.
Bonds: (as at 4.00pm). The ten-year is trading at 2.665%. The 2-year is trading at 2.518% and the 30-year is at 2.994%. The ten-year bund closed at 0.101% and the British gilt closed at 1.16%. The U.S. curve closed on the day with the following closes 2/10 at 14.5bp, 2/30 at 47.6bp and the 10/30 closed at 33bp. The U.S. 5-year closed at 2.493% and the 10-year yen gilt is trading -0.023% while the 2/5 spread is now -2.7bp.
Commodities: WTI rose 2.4% and Gold rose 0.7%.
Bitcoin is trading around $3,572.64.
Aussie Market Today.
Equities will most likely look to rally. With the U.S. market closed today, equities will most likely look towards Asia. Chinese stocks fell Friday because of weak factory prices. If the Chinese believe that a trade deal is close, they are likely to rally stocks and that will have a flow-on for Australia. What all this means is that stocks will be rudderless probably until Wednesday when the U.S. exchanges reopen following the President’s Day Holiday. I expect the next couple of days to be choppy.
With the U.S. closed and Europe and Asia likely to rally on weak economic forecasts, Australian bonds will most likely follow suit. I expect bonds to rally because of European trade fears. The bond market, however, will not do too much with the U.S. closed Monday. Wednesday is likely to be the day we see any major movements.
Geopolitical risks remain high and still need to be monitored.