Just another Manic Tuesday. Wish it was Wednesday, because the bad dream would be no longer. The day for stock traders could have been worse and in an encouraging sign stocks recovered a little, or maybe we are all fooled again, and the rally was a little bit of short covering profit taking. It does not matter because that man Trump was seen as the instigator of the weakness.
The worry is that fresh levies will be imposed on China. The issue is that the stock market had already factored in a deal being done sometime this year. With Trump’s comments and with China’s top negotiator Vice Premier Liu vacillating on whether to attend the trade talk meetings, maybe the deal is not as close as expected.
China has already indicated that if the U.S. raises tariffs they will also raise tariffs on U.S. goods. It’s possible that Trump read a commentary that suggested that China needs the U.S. more than the U.S. needs China. This in academic terms maybe be right but all one has to do is go into any retailer or pharmacy and note that many of the goods are manufactured in China.
To emphasise the point, U.S. farmers are feeling the pinch of trade tariffs. The mid-west should be in the throes of planting, and as a result diesel should be becoming more expensive. That’s not the case. Farmers are behind on planting with Illinois corn farmers having planted just 10% of their arable land. At this time of year, they would normally have finished planting about 66% of the arable land. As a result, diesel prices are falling to levels not seen since 2016.
This uncertainty caused the pain for stocks. In the Dow, all 30 stocks were in the red. The Dow had its second biggest fall of the year, and the S&P 500 and Nasdaq registered their third largest percentage fall. At one point, some 89% of stocks on the NYSE traded in the red, beating the threshold on December 24 when the S&P was routed by 2.4%.
Comments from both Lighthizer and Mnuchin raised concerns and the stock market reacted accordingly with exporters hit and a risk off attitude. All 11 sectors in the S&P 500 were in the red, with only utilities and energy falling less than 1%.
Today was a risk off day so bonds enjoyed a good day out. Yields fell about 2-5 bp depending on what part of the curve you were trading. Yields retraced to a five-week low. However, amongst all the froth and bubble bond investors were unwilling to take yields much further. If anything, levels are now seen as neutral.
The upbeat payrolls report in April on Friday provides the opportunity for the Fed’s interest rate decision to remain on hold. There is no reason to cut or raise rates. To emphasise this point, the 3-year auction saw mediocre demand with the weakest read since January. Overall auction demand was 2.48 and the bonds were issued at 2.248%.
Once again commentators are pointing to a possible curve inversion with some pointing to the American manufacturing data as evidence that the economy is slowing.
Across the pond, European bonds rallied after the European Commission revised down euro area growth forecasts and cut its forecast outlook for Italy. Growth is now predicted to be 1.2% for the region which is fractionally slower than the 1.3% predicted in February. Bunds rallied in response to the Sino-U.S. trade tensions. Bunds were seen as a safe haven and rallied accordingly.
Some points on what to watch as far as markets go:
· Markets are tired of the central bank mantra of patience. Neutrality is not desired. What markets want is reflation. The only central bank with a strong stimulus package is the People’s Bank of China. Markets want the others to match the PBOC.
· Trade talks, or rather the hint that progress is slowing, is affecting markets.
· Watch China’s and Europe’s economy for bottoms. The hard economic data will tell us if a turnaround has been achieved. Sentiment can move quickly so it’s best that the data be watched closely.
· We have avoided the dreaded earnings recession for the moment. However, with stocks and PE’s so high, a quarter or two of flat earnings will not cut the mustard. Earnings expectations for 2020 are now 10% higher.
The RBA will be paying close attention to the labour market and it is still worried about inflation being too low. The point is that Australia is already towards the low end of its unemployment levels. The problem is not unemployment but, like many other countries, it is under-employment. And that is a structural problem.
People are being trained in jobs where the outlook is poor. Engineering is one such profession. You would think that with so much building, mining and development, there would be a great demand. This is not the case. Many positions are being filled by people visiting from offshore. For many businesses, it is also easier to employ people in casual positions.
For a company, this provides tremendous flexibility but it does not allow wages to rise to meet demand. If a central bank cannot see the problem that under these conditions, wages will remain persistently low, then they need to throw away the text books and look at some real-life problems. In the medium term, unless there is some systematic effect both wages and inflation will remain low.
Equities: The S&P 500 fell 1.65%. The Dow fell 1.79%. The Vix closed at 19.32. The Stoxx Europe 600 Index fell 1.4%.
Currencies: The Bloomberg Dollar Index gained 0.2%, and the euro was fell 0.2%. The pound slumped 0.3%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.448%. The 2-year is trading at 2.282% and the 30-year is at 2.858%. The U.S. curve closed on the day with the following closes 2/10 at 16.90 bp, 2/30 at 57.6 bp and the 10/30 closed at 40.6 bp. The U.S. 5-year closed at 2.253%. The 2/5 spread is now -3.1 bp. The ten-year bund closed at -0.035% and the British gilt closed at 1.62%. The 10-year yen gilt is trading -0.051%.
Commodities: WTI fell 1.8% to $61.12 the lowest level for 5 weeks. Gold rose 0.3%.
Bitcoin is trading around $5,851.
Aussie Market Today.
Equities today may well like the phrase sell in May and go away. Because it may well be a day where first in best dressed will prosper. I expect to see selling based on the U.S. close and in the light of trade tensions. If we see some clarifying statement today, then equities could rally. Look to Asia for the day’s direction. However, I suspect we will also see a sea of red.
I am expecting bonds to rally today. Those traders who cut their positions yesterday will no doubt be lamenting that decision. Its risk off and I expect some movement especially in the longer maturities. Credit appears to have edged in a little so that should be good news for the credit traders. It should be a very good day for the traders who are long. Today is risk off day and unless we see commentary suggesting otherwise bonds could retrace to earlier levels.