There is an old saying reap as you shall sow, and that’s probably what is happening to markets at present. To say that investors were a little ahead of the central banks is probably an understatement. So too is the resolve of the central banker to not be bullied by the market at present. And that appears to be the situation.
Bunds and treasuries weakened because investors are paring back expectations to what the ECB will do with their stimulus package. The inversion that we feared has suddenly become normal.
What was telling on the day was that those companies that featured in the latest risk on rally found themselves unloved and as such were sold. Health care led the decline and so too the large tech stocks. High dividend-yielding stocks lost favour. The momentum trades for the moment appear to have lost their sting and this too is scaring off investors. What we have now is a situation where investors are waiting for the next move in trade and my guess is that not a lot will happen at the next round of talks. Value stocks have staged a solid rally whilst growth stocks have been burned.
Bonds weakened as a result of ECB expectations being pared back. Money markets are expecting just a 10 bp cut in the deposit rates. It is expected that a tiered system will be introduced and as such this will limit the impact on banks.
Ford was cut to junk by Moody’s. Ford is now rated Ba1. Ford is still rated BBB by S&P but is on a negative outlook.
The trend towards negative yields appears to now be unstoppable. Negative yield bonds now tally $17 tr. Thirty percent of all investment-grade securities now bear sub-zero yields. So, what are the risks? Apart from creating a bubble of sorts pension funds are being drained of income and riskier companies are being incentivised to mortgage assets and banks have to advise clients that they won’t be charged for deposits.
What Could Possibly Go Wrong?
Equities: The S&P 500 fell -0.01% The Dow rose 0.14%. The Vix closed at 15.27.
Currencies: The Bloomberg Dollar Spot Index fell 0.1%.
Bonds: (as at 4.30pm). The ten-year is trading at 1.647%. The 2-year is trading at 1.595% and the 30-year is at 2.131%. The U.S. curve closed on the day with the following closes 2/10 at 4.7 bp, 2/30 at 53.3 bp and the 10/30 closed at 48.2 bp. The U.S. 5-year closed at 1.50%. The 2/5 spread is now -9.6 bp. The ten-year bund closed at -0.586% and the British gilt closed at 0.592%. The 10-year yen gilt is trading -0.25%. The 10-year OAT (France) closed at -0.278 and the Italian 10-year bond (BTP) is now trading at 0.947% and the 30-year at 2.066%.
Commodities: WTI gained 2.7%. Gold fell 0.4%.
Bitcoin is trading around $10,351
Aussie Market Today.
Stocks to be mixed on the day. Shares have staged a good rally over the past few days and today looks likely to be a consolidation day.
Bonds to continue to weaken. With both the U.S. Treasuries and European bonds weak it is hard to see how bonds can rally. Bonds to weaken probably 6bp from yesterday. The relief may come in the form of an RBA easing and if the data remains weak that is likely.
Credit to drift wider on the day. Quality corporates remain in demand and so too bank sub.
Geopolitical risks remain high and still need to be monitored. Watch developments out of Hong Kong as the protests have a real chance of upsetting sentiment in the region. Watch for a tweet on trade or comment on trade out of China, either commentary will have the ability to move markets.