Be Careful Of The Webs You Weave!

The line can best describe the markets today. On a day that was scant on a lot of detail, comments from Mnuchin and Kaplan fueled the bonfires of markets. Kaplan the Dallas Fed President commented today that the Fed could tighten a further three more times despite the current data suggesting that the economy could have hit a hole. Kaplan remains optimistic on the economy. Corporate earnings once again are proving to be a disappointment as they are not as strong as expected and the scenario looks all too reminiscent of the last few years. Deja vue perhaps?  It would appear as though the Fed wants to get rates up to provide leverage over the economy should the economy falter, in other words have the ability to ease rates. Global growth will be the key – and with uncertainty over world trade and growth markets may well have to contend with economies that are growing at below trend growth rates.

Steve Mnuchin gave the market oxygen today when he made the claim that once the Health Care Bill goes through next week that the tax cuts and reforms would happen soon. The equity market rallied some 0.85% to record one of its strongest days since early March. This raises the question as to how the Budget will look. With already a significant debt to GDP blowout and also with the need to raise the Fiscal Ceiling it is hard to imagine how a tax cut will alleviate the situation. But a tax cut is great for business and allows companies to record bigger profits without any significant changes in operations. What also remains to be seen is how, if funds are repatriated, how those funds will be used. In the past when indemnities were provided those funds went to share buybacks and increased dividends. If Mnuchin wants the Budget to get anywhere near balance or maybe even reduced he is better off if those moneys are used to increase productivity and wage increases, neither of which in all the rhetoric have been alluded to. In other words the tax reform is aimed squarely at the people who stand to benefit the most. If this is the case then Trump and Mnuchin will have a task trying to get their Bills through the conservative elements of the Republican Party and will struggle to gain support from the Democrats. The rally in other words could be short lived.

Oil may also be providing a lead on global growth. A few weeks ago oil started to climb as bullish bets were being placed on the belief that the Saudis and Kuwait knew what they were doing with oil output. Unfortunately there is a lot of inventory and as that inventory declined and as prices rose, production was ramped up in U.S. and also new inventory came onto the market. In other words the artificial price rise was exposed. Oil, or rather the demand for oil, is dwindling and this lack of demand is happening as more oil is coming out of storage because of higher prices. Oil is in contango at present. To this effect it was reported that Glencore purchased a tanker of oil from Total SA at a discount of $1 a barrel the widest discount for some 22 months. The Chinese are buying less oil as the U.S. has ramped up production. If you believe that oil is a barometer of growth then perhaps oil is providing a contrary signal.

On the day the equities markets had a solid rally based on Mnuchin’s comments regarding tax. The Dow was up 0.85%. Bonds weakened a little trading back to 2.23%. Bonds remain resilient and are strong perhaps for geopolitical reasons however in my view they are strong because bond traders simply do not believe the optimism that the equity market traders see.  Bond traders are skeptics and for good reason. Talk is cheap and easy, delivery is hard. Trump has a lot of hurdles to get through and with the current debt ceiling looming large and needing to be funded that ceiling will become an imperative. For the moment the Trump Government looks distracted and that does not help push tax reforms through Congress or the Senate.

On the day bonds closed at 2.23%, the curve flattened slightly. The closing spreads were 2/10 closed at 104.3 out 1 bp, 2/30 closed at 169.20 in 0.5bp and the 10/30 closed 64.70 in 1bp. THE German 10 year bund closed at 0.24% up 4bp.

Commodities were mixed to down with oil retreating 0.3%. The Dollar Index was flat, the pound was slightly stronger up 0.3% and the yen retreated 0.4%.Industrial metals were mixed.

Aussie Market Today.

The equity market could see a solid rise today as the U.S. market led the way today. I expect bonds to have a slight pause. The issue for the markets today will be with the public holiday on Tuesday whether traders will want a position heading into the weekend with the likelihood that trading will be thin Monday, the public holiday Tuesday and global markets open. I expect trading to be choppy. The Aussie dollar could be a little stronger as the U.S. dollar appears to be a little stretched at the moment.