All about earnings.

If anyone can decipher the day, they have done well. The theme of the day was earnings and that’s where the confusion started. The S&P 500 rose a little while the Nasdaq closed almost at a record high after Apple was flat and Qualcomm rose. (Litigation between Apple and Qualcomm has ceased.) Netflix rose but ended lower after releasing its results and the same could be said for IBM.

Earnings weakness in Bank of America and United Health was offset by Blackrock Inc’s results, while the market has forgotten about Johnson & Johnson’s litigation problems and rallied after the company reported strong earnings. As you can see, it was a mixed bag. The problem is that there is no consistent theme and the earnings releases are not giving a sense of the strength of the U.S. economy nor a sense of what is motivating consumers.

From a practical point of view, stocks look solid and perhaps have more to go after briefly touching what appears to be the low for the time being. With the shortened week, optimism over earnings is boosting the bullish sentiment. Earnings reports to look forward to this week include PepsiCo, Honeywell, Netflix, Morgan Stanley, and Alcoa. Volume was solid on the day.

The economic data released today was industrial production for March. Industrial production was down 0.1% on flat factory output. Mining production was down 0.8% and durables were down 1.8% while business equipment was up 0.4%. February was revised up 0.1% and factory output was revised up to -0.3%. Manufacturing output was the largest quarterly decrease in production since 2017.

Manufacturing output was unchanged for March after the previous two months recorded declines. Weak motor vehicle production and wood products restrained growth. The Boeing 737 Max aircraft was a notable drag after production was halted because of two disastrous crashes.

For bonds, the Easter week is a boon for stocks and risk on trades but not so good for risk off. Bonds continued to be sold on the day as the risk appetite grows.  The China economic data is driving the risk on trade. The expectations are that China will surprise on the upside with its growth numbers and retail sales.  The new range for the 10-year appears to be between 2.40% and 2.60%.

Data in Germany will drive the bunds later this week with all eyes focussed on Economic Sentiment and Current Conditions report. On the day, bunds were trashed earlier but then recovered to be square on the day. Gilts are heading towards the psychological barrier of 1.25% and with Parliament in recess, Brexit is the word.

Apparently, Germany has suggested that the UK may require an extension beyond the October 31 deadline. Bonds in Italy rose after the Bank of Italy said the country’s deficit would rise to 3.4% of GDP in 2020. This would breach EU rules and could lead to an increase in sales tax. The 10-year rose 7bp to 2.63%.

The Rant

The U.S., in making its trade deal with China, is said to be making their own arrangements relating to enforcement. Both sides will be subject to an enforcement mechanism which strikes at the very heart of the international rule of law. Effectively, either side will now become judge, jury, and executioner in determining if obligations are being honoured.

The whole process is being designed to sit outside the WTO and for the business community, it exposes them to the risk of constant enforcement. For China, this could become a powerful club to ensure that U.S. companies tow the China party line if they wish. It would be naïve to expect that this club would not be used politically at some point in the future. And the U.S. trade representatives are not planning on seeking Congressional approval for the China arrangement.

Trump will see this as a victory over the WTO and for Congress, this will raise fears that China can strike U.S. exporters as it sees fit. With no arbitration, issues can rapidly escalate.

Market Recap.

Equities: The S&P 500 rose 0.05% and the Dow rose 0.26%.  The Vix closed at 12.18 while the Stoxx Europe 600 Index rose 0.3%

Currencies: The Bloomberg Dollar index rose 0.2% while the pound fell 0.3%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.592% while the 2-year is trading at 2.414% and the 30-year is at 2.995%. The U.S. curve closed on the day with the following closes 2/10 at 17.6 bp, 2/30 at 57.8 bp and the 10/30 closed at 40.0 bp. The U.S. 5-year closed at 2.406% and the 2/5 spread is now -0.8 bp. The ten-year bund closed at 0.063% and the British gilt closed at 1.22%. The 10-year yen gilt is trading -0.021%.

Commodities: WTI rose 1.1% while gold fell 0.9%.

Bitcoin is trading around $5,204.

Aussie Market Today.

As we head towards the Easter break, equities are rallying, and I expect that trend to continue on the ASX. With China expected to record some strong data, this could well be the siren call for risk on trades and if so, expect a decent rally.

Bonds are in risk-off mode. This means expect further selling. As we approach the long break for Easter, we may see some book squaring leading to brief rallies of sorts. However, the direction for the moment is up in yield. Demand for credit is increasing as the hunt for yield continues. Credit demand is also being driven by the rally in the equity markets. The rally is leading to a tightening of spreads and as such credit is performing.