That’s a little how the markets feel today. From the rollercoaster of yesterday, all is forgiven after President Trump moved to say he would clinch a deal with China. That’s a strange negotiating tactic as he appears to have crumpled after China imposed more sanctions in a tit for tat action. However, China also released comments to soothe markets and suggested that they had a good dialogue going with the U.S. and effectively echoed Trump’s comments.
The S&P 500 rose following Trump’s comments but remember the index is still down around 4% since May 5 and towards the close the rally petered out. The exporters saw solid gains with Boeing up 1.7%, Uber and Lyft rose 7.7% and 4.9%, respectively. Disney announced it would take control of Hulu in a bid to challenge Netflix. Disney rose 1.4%. Of the 11 major sectors all but utilities were in the black at the day’s close. Volumes were tepid.
Bonds enjoyed the ride for the day and staged a minor pullback. Yields were up about 1 to 2 basis points, whilst safe havens such as the swiss and the yen weakened slightly. So, the best way to describe the markets are that we have a classic risk on. This behaviour is unusual given the previous day’s movement. Retail sales are due later in the week and the data will be closely watched.
New York Fed President John Williams commented today that recoveries from recessions and low inflation will be torturously slow unless policymakers get a better grasp on how to stabilise the global economy. Williams cited declining birth rates and slowing technology advances. These are capping economic growth. The aging population in wealthier economies has led to increased savings rates and lower demand, meaning neutral interest rates are lower than previous times. (Williams helped develop the theory on neutral rates).
Italian bonds were the flavour of the day. A lacklustre government debt auction and concerns about growth, and rising debt has spurred the rise in bond yields. The spread between the Italian 10-year and 10-year bund (German bond) is now out at 282.6 bp, its widest level for several months. On the day, the German 10-year bund hit a six-week low of -0.083%. The ZEW economic sentiment survey showed that sentiment has deteriorated unexpectedly in May.
For a little gossip, it appears that all that glitters is not gold and that’s the way many condo owners feel about Trump Tower in NYC. Since 2016 most sellers have recorded losses with several selling in excess of 20%. This compares to just 0.23% of condos across Manhattan selling at a loss these past two years.
Apart from his Trump Hotel in Washington, a number of Trump branded buildings have removed the Trump name. The commercial portion of the building has been struggling to find tenants with 42,000 square feet of vacant office space available. And that’s after advertising rents well below the area’s average.
So, what’s going on between China and the U.S.? It appears both have miscalculated the others position. The recent tit for tat move by the Chinese was aimed directly at the U.S. stock market given the timing of the statement. Trump prides himself on the performance of the stock market as a benchmark of his presidency but this has lately worked against him. The stock market was fully valued when he took office. Both the Fed and the Chinese Communist Party have dented stocks performances.
The Fed helped spur some gains this year by changing its stance on rates whilst China now appears to lead markets. China led markets down in 2015 and up in 2016. One only has to remember that for many Asian countries and European countries and especially Germany, China is an important export destination.
For Trump, the game is to force China to stimulate its economy and in doing so that helps U.S. companies. If Trump can reach a deal with China that could push stocks to a record. By winning on the stock market, Trump helps his re-election prospects and that’s critically important.
Equities: The S&P 500 rose 0.8%. The Dow rose 0.82%. The Vix closed at 18.06. The Stoxx Europe 600 Index gained 1%.
Currencies: The Bloomberg Dollar Index rose 0.2%. The euro fell 0.1%. The pound fell 0.2%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.414%. The 2-year is trading at 2.199% and the 30-year is at 2.85%. The U.S. curve closed on the day with the following closes 2/10 at 21.3 bp, 2/30 at 65 bp and the 10/30 closed at 43.5 bp. The U.S. 5-year closed at 2.191%. The 2/5 spread is now -0.9 bp. The ten-year bund closed at -0.067% and the British gilt closed at 1.108%. The 10-year yen gilt is trading -0.05%.
Commodities: WTI climbed 1.1% on increasing tensions in the Gulf. Gold fell 0.3%.
Bitcoin is trading around $7,700.
Aussie Market Today.
If you feel confused, then be confused. It’s a risk on day today so crawl out from under that rock and buy. Unless we see some comment that goes against what has been said recently, then equities will rally. Watch the space for trade comments. However, now that both China and the U.S. have bruised the other, we can invest a little easier for the time being.
Classic risk on behaviour last night although it was a little guarded towards the close. The bonds, fixed rates at least should be a tad weaker on the day and credit should see an improvement over the day as equities rally. The selloff in the U.S. was muted so I don’t expect too much selling here. With the election on the weekend, bonds probably won’t get too heavily sold until next week, as investors could be more inclined to sit on their hands and wait. The Aussie has a feel of weakness but that could change with changing sentiment.