The lights were pulsing and flashing as May went to the UK Parliament to vote for Brexit in essence and a vote of confidence in Theresa May. Markets were hushed in anticipation and ready to pounce. Unfortunately, for the shorters, there were no easy pickings and a big hurrah for Theresa.
You see, May, as I am writing, appears to have sufficient support to survive the Vote of Confidence. Markets are on pause awaiting an outcome. The pound rallied and is off its 20-month lows. However, 10-year gilts (UK bonds) were trashed up some 9 bp but that is understandable. It is not every day you get to vote the Prime Minister out. For the record, it appears as though 158 colleagues have publicly indicated their support for May, and that’s enough for May to survive and provides a simple majority. It appears now that 200 colleagues have voted for May.
Whilst all this drama is going on across the pond, U.S. treasury traders were poised to do something. The CPI was a yawn and treasuries drifted. The excitement boys, the CTA traders appear to have slept in, because there has not been a peep out of them since the 10-year smashed 2.92%.
The CPI number was the weakest read in eight months and was flat. For the Fed, the moment of truth for rate hikes may be approaching soon. There is a suggestion that the Fed will move to the sidelines if activity and growth slow sharply.
The disco lights came out for the stock market. The lights were flashing as revelry was back. Global stocks rallied partly because China bought its first soybean purchase in more than six months. China appears to be making concessions on trade (that’s a strong positive). The major headwind was tariffs and if that is removed then stocks can probably rally.
For some in the U.S. Treasury market is a conundrum. What to do? If the economy slows then bond yields fall. However, Government debt is ballooning at an alarming rate. At a time when the economy is good, the debt has increased at the fastest pace since 2012.
Public debt outstanding has surged $1.9 tr since Trump took office, roughly the size of Brazil’s GDP. The U.S. debt now stands at $21.9 tr. The debt is expected to grow by $4.4 tr by the end of Trump’s first term in office and at a time with historically low unemployment, low interest rates, and reasonable growth. I dread what happens if a hard recession ends this party. The key date for Government Funding, i.e. debt ceiling is December 21. Its hard to see any agreement being reached between lawmakers and the level of acrimony between the two parties.
And for those refugees from German banks, there is a published rumour that big brother (Deutsche Bank ) is being pushed to merge with the bloated little brother, Commerzbank, (Dresdner was the middle child but Commerz ate Dresdner) at the behest of the German Government.
German officials are making the merger sweeter through some appealing tax changes and changing existing laws to make such a transaction less costly. When the news was announced, Deutsche Bank rallied 6.5% and Commerz rallied 7.1%. The negatives are both banks have their issues and such a move could mean no dividends for some time as the restructuring occurs. DB CDS spreads were tighter by 12bp on the reported rumour.
Equities: The S&P 500 was up 0.83%. The Dow rose 0.64%. The Vix closed at 21.18. The Stoxx rose 1.7%.
Currencies: The Bloomberg Dollar Index fell 0.4%, the euro rose 0.5%, and the pound rose 1%.
Bonds: (as at 4.00pm). The ten-year is trading at 2.911%. The 2-year is trading at 2.77% and the 30-year is at 3.15%. The ten-year bund closed at 0.271% and the OAT closed at 0.732%. The U.S. curve closed on the day with the following closes 2/10 at 14bp, 2/30 at 38bp and the 10/30 closed at 23.90bp. The U.S. 5-year closed at 2.77%. The 10-year yen gilt is trading at 0.054%.
Commodities: WTI fell 1%, gold rose 0.2%. Copper fell 0.13% (Nymex Jan contract).
Bitcoin is trading around $3,436.
Aussie Market Today.
The UK result for May and the possible easing trade tensions between the U.S and China should set the day up for a rally. Depending on the level of scepticism out of Asia, the rally could possibly be stronger than expected.
If the equity rally intensifies expect bonds to sell off. I am not expecting any major movements, more likely a little drift with some institutional buying in dips. Credit gapped in last night and that may spur some buying and that was on the exchanges.