Who would have thought?

Well here we are again and who would have thought?  Who would have thought those years ago that at this point in time the UK still has no Brexit agreement and has extended its deadline to leave the EU to June? And in the meantime, there is delicate tightrope of diplomacy to walk.

Who would have thought that Trump would face a showdown from the Senate (his own party) over his border emergency? It appears as though a showdown is coming, and Trump may decide to use his power of Veto to force his way. To prevent the veto, 67 votes were needed and we saw the vote go 59-41 against in declaring a national emergency.

What’s at stake here? Trump will look to divert Pentagon money to pay for border wall construction that Congress won’t fund. The wall would be mired with litigation and technicalities because the diversion requires the building of a wall and the wall has to be for the protection of the soldiers, something that would be difficult to prove in a court.

Who would have thought that the trade stoush between China and the U.S. won’t be resolved before the end of March? Because that’s what concerned stock markets in the U.S. today. European stocks rallied on the vain hope that Brexit may be delayed or derailed. And Europe was against the trend.

Stock traders remain concerned over the slow down in China and are cautious especially as Asian stocks have rebounded over the quarter. The China trade tariff effect appears to now be fully priced in stocks. The wild card would be some negative surprise. It is expected that there will be some form of signing ceremony in spring, so the pressure is on for an agreement of sorts.

Sentiment in the stock market is hinging on the continuing stance of the Fed. There is a suspicion that in order for stocks to sustain current levels that the Fed will need to follow through on its pivot. Why is this important? If investors move to risk off, stocks will fall and bonds and other risk-off assets will rally.

Of concern for some is the slowing U.S. economy. The number of applications filing for benefits this week increased more than expected with a suggestion that the labour market is slowing. Housing remains in the doldrums and the dovish stance by the Fed remains consistent with the economy. New homes declined 6.9% seasonally adjusted. The effects of the government shut down are still reverberating through the economy.

Uncertainty appears to be the name of the game at present.

In a period where liquidity is thin and volumes light, some investors are starting to ponder over the rally in IG corporates. Corporate bonds have had a stellar run with spreads tightening and as Treasuries have rallied, they too have benefitted from duration as yields fall.

Over the last couple of months, credit has tightened 35 bp from a peak of 163 bp (ICE BAML data). There is a sense that whilst the spike was unwarranted, the current tightening is also unjustified, and some are looking for a correction.

However, not all is ill. Some issuers such as Verizon, have been paying down net debt. Others, like AT&T, are issuing new debt to extend their maturity walls and ease near term debt burdens. Others, like GE, are selling assets. What’s at stake is simple. Many corporates are wanting to maintain their investment grade ratings including those lesser graded corporates such as the BBB, BBB- rated companies.

The bond market today saw some selling. Volume was light and Japanese sellers were deemed to be the culprit. As Japan heads towards its fiscal year-end, some Japanese investors have been selling in an effort to bolster their balance sheets. Heavy corporate issuance this week was also cited as another reason for the slight decline.

 

Market Recap.

Equities: The S&P 500 fell 0.1% while the Dow rose 0.03%. The Vix closed at 13.50 while the Stoxx rose 0.8%.

Currencies: The Bloomberg Dollar index fell 0.3%.  The euro rose 0.4% the pound leapt 1.4% and the yen gained 0.2%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.628%. The 2-year is trading at 2.463% and the 30-year is at 3.044%. The U.S. curve closed on the day with the following closes 2/10 at 16.5bp, 2/30 at 58.1bp and the 10/30 closed at 41.4bp. The U.S. 5-year closed at 2.43%. The 2/5 spread is now -3.4bp. The ten-year bund closed at 0.087% and the British gilt closed at 1.23%. The 10-year yen gilt is trading -0.04%.

Commodities: WTI rose 0.6% and gold fell 1%. Copper fell 1.52% weighed down by weak Chinese data.

Bitcoin is trading around $3,855.

Aussie Market Today.

Equities should remain in a holding pattern. We could see little improvement on the day as sentiment in Asia remains positive. There may be some selling of stocks by Japanese sellers.

Bonds are in a holding pattern. Expect a little selling, maybe some selling from offshore, as well. Bonds have rallied significantly over the past month so a pullback should not come as unexpected. The direction remains intact and that’s for further falls in bond yields, it will just take time.