Today was a day that could herald choppy market conditions ahead. The markets ran on fear that Trump will set in motion the tariffs that he threatened China with and that created nervousness within the equity market and led to some derisking.
U.S. equities tumbled the most this month whilst both the dollar and emerging market currencies retreated. Tech stock weakness was the catalyst for the fall, leading to some optimism that if the fall represents the digestion of $200 bio of tariffs then perhaps we have seen the bottom in tech stocks. However, I am not so sure about this.
JP Morgan issued some concerns over valuations in the equity market, believing that algo traders have driven the bullish sentiment too far. Their fear is that as the market is so saturated with quant trading systems that any sell-off will be amplified.
China’s Shanghai Composite Index closed at the lowest level since 2014. The Index fell 1.1% below its January 2016 level when Chinese officials scrapped a disastrous circuit breaker that led to significant falls in equities. Turnover is dwindling and some companies have become more reliant on debt. The benchmark is on track to record a fourth quarter of losses, the longest string of declines since 2008. The currency has fallen almost 7% since March making shares less attractive to foreign buyers.
Not all is bad, however, for the Chinese and the tariff war may backfire badly on the U.S. Unlike the U.S. where much of the recent tax cuts have been paid out as dividends or share buybacks, the Chinese have been quietly moving away from cheap exports towards advanced factories and products. This process has accelerated under the umbrella of Trump’s tariffs. China is becoming more competitive whilst the U.S. has become spendthrift. The Pearl River Delta is a good example to see this massive change.
Meanwhile, bond traders are increasing bets that the Fed will hike rates into 2019. The increase in net shorts open interest has increased in line with longer-dated maturities into 2019 and even into January 2020. The bond markets remain on edge and even the ECB is not immune. Benoit Coeure has suggested that the ECB should provide further guidance to the pace of tightening that it expects to initiate in 2019.
Equities: The S&P fell 0.6% and the Dow fell 0.36%. The Stoxx 600 rose 0.1% while the Vix closed at 13.68.
Currencies: The Bloomberg Dollar Index fell 0.3% while the euro rose 0.5%.
Bonds: The ten-year closed around at 2.98%. The 2-year closed at 2.788% and the 30-year closed at 3.128 %. The ten-year bund closed at 0.456% and the OAT closed at 0.771%. The U.S. curve closed on the day with the following closes 2/10 at 20.5 bp, 2/30 at 34.6 bp and the 10/30 closed at 13.9 bp. The U.S. 5-year closed at 2.88%.
Commodities: WTI fell 0.4% while gold rose 0.4% and copper retreated 0.5%.
Bitcoin is trading around $6,249.
Aussie Market Today.
Aussie equities are likely to be weaker. Watch for news relating to Trump as he is expected to announce the severity of the tariffs later today. Asian market reaction will most likely determine the direction of Aussie equities today.
Bonds may be in for a risk-off day again. With the looming storm of tariffs, bonds may once again be a safe haven.
The Aussie dollar improved for a while but is now retreating in line with commodities.
Geopolitical risks remain high.