Come here the noise

Come Hear The Noise!

That’s how one could feel about the markets at present. Yesterday Draghi set the Euro markets alight, well a weak tepid fire perhaps by not announcing anything about the paring back of the euro 60 bio or so of purchases. The European economy is growing nicely and inflation at 1.39% is well below the target level of 2% (why do all the central banks have the same inflation target?) and the low inflation is the reason for no paring back at this stage. My own view is that Draghi is too smart to be dragged into the commentary that the Fed finds itself and will announce any changes when it’s obvious.

The U.S. yield curve does have a number of U.S. market luminaries in a flutter. The flattening yield curve has a number of participants worried that a recession may be lurking around the corner, whilst others point to historical evidence over the past 60 years to divine a no recession. What most fail to appreciate is the rapidly changing landscape in the U.S. where technology will make a number of jobs redundant and given the high levels of indebtedness caused by car leases, student debt and burgeoning credit card debt a misstep could easily send the economy weaker and leave the Fed scrambled.

Political uncertainty is rising. Exxon was fined $2 million today because of breaking the imposed Russian sanctions. Rex Tillerson was the CEO at the time when the misdemeanour occurred. Trump has a bigger problem on his hands with Mueller investigating Trump’s dealing with Russians going back 10 or so years ago to see if there are any links. Trump Tower has a number of Russians and Russian entities as owners and Trump sold a Florida mansion to a Russian Oligarch back in 2006. Unfortunately, the Russian story is looming large when policy ought to be the fare of the day.

More importantly however is the concern over the debt ceiling is looming large. S&P have already commented that a failure to avoid a shutdown would result in a downgrade and at this stage we are hearing nothing from the Republicans as to how they will avoid a shutdown nor have we heard anything from the Trump camp. Remember Trump has said that maybe a shutdown would be good and when in 2013 the U.S. came dangerously close to shutting down, on October 2013 Trump tweeted that “Obama’s complaints about Republicans stopping his agenda are BS since he had full control for two years. He can never take responsibility.” I wonder if Trump believes the same today should the debt ceiling concerns escalate.

The concerns that investors should be watching are:

  • U.S. geopolitical risk
  • U.S. bond yield curve
  • Indebtedness of the U.S. consumer (holding back on retail spending is the first sign of stress)
  • The credit spread between investment grade bonds and sub investment grade bonds which are currently very narrow on a historical basis.

On the day stocks were sluggish. The S&P closed unchanged, the Stoxx 00 fell 0.4% the Nasdaq hit a new high and was up 0.1% and the Dow was down -0.13%. Home Depot was the stock of the day, some 20 year ago it supplanted Sears to replace Sears in the S&P 500  and finds history repeating after Sears marks a deal with Amazon. Sears rallied 10.6% and Home Depot fell 4.1%. The market did not react to Trump’s boast that he had just removed 800 proposed regulations that were never finalised during Obama’s term. The market consensus was “It’s not going to be better or worse”. On the day 5.92 billion shares traded versus a daily average of 6.35 billion.

Bonds were little changed. The U.S. 10-year traded slightly better to close at 2.25%. the yield curve flattened slightly and the closes were 2/10 90.3 in a point, 10/30 56.8 in 1.4bp and the 2/30 closed 146.90 in 2.2bp. The benchmark bonds in Europe were slightly tighter, the Bund closed at 0.526 in 1 bp in yield the French 10-year in 2 bp at 0.77%.  Brexit is starting to weigh on both the pound and bonds. The UK has stated no deal needs to be reached and that they won’t be disadvantaged. History would suggest that, that is not true.

Commodities saw gold stronger by 0.2%, and WTI fell 0.7%. Russia and Venezuela have entered into discussions to avoid U.S. sanctions. Rosneft is negotiating to swap its collateral in the Venezuelan owned U.S. Refiner CITGO. The Europeans have criticised the U.S. plan to impose steel tariffs and are expected to trigger swift safeguard actions.

Aussie Market Today

The Deputy Governor for the RBA is talking today, some market participants believe that he may provide a clue to whether the RBA will look to raise interest rates next month. Such a move would be interesting as the economy has become heavily dependent on the building industry to provide jobs and given the generally high level of debt in the average household some 195%, a rise could be problematic. Retail is slow and like the U.S. productivity and wage have fallen. Inflation remains weak. A rise in rates could be a significant problem for the economy. The equity markets could see a selloff as traders take profits a head of the weekend and also the lack of direction from offshore markets. Bonds will probably be better on the day as the tone for bonds globally is positive at present.