SURF’S UP!

Today, the ECB picked up its bucket and spade and drew a line in the sand and no one dared to cross. The reason is that the ECB decided that QE will cease in December and rates are likely to be hiked in summer 2019.

What this means is that later in the year the surf will be up and you better get that big old trusty mal to ride the surging surf otherwise the surf will smash your small board.

The surf, of course, will be volatility.  Expect that to surge and build in much the same way that big old wave out the back looking rather innocuous grows and grows as the water gets shallower and the speed increases. Maybe it will be a rolling surf or maybe a choppy surf, but the wave, ergo volatility, is going to increase.

The increase in volatility will impact bonds and equity alike but probably in different ways. Equity will be carefully looking at growth and the discount rates to calculate fair value.  The bond investors will be looking at government revenues, deficits, issuance and possibly inflation.

For the European markets, the line drawn by the ECB was refreshing. Rates were not going up just yet.  The euro slipped and bonds were steady. The ECB will cut its bond buying in half from October (15 bio euros) and then shut down in December. The ECB is comfortable with inflation but a little concerned about growth and this is something that Asia is also focused on after China appears to be slowing a little.

Draghi was a little dovish in the wording of the manifesto.  However, the big caveat is the trade tariffs that Trump has threatened to impose as early as Friday. The EU has a retaliatory tariff plan that would come into effect on the 20th June. Hence, everything is a little up in the air.  Markets are likely to become quite choppy over the next few weeks depending upon what the Trump administration does.

Certainly, the IMF is concerned.  Christine Lagarde suggested that if countries retaliate against the U.S. tariffs,  the global trading system would be undermined and stymie global growth. Lagarde suggested that any retaliation would dampen national and international investment, interrupt global and regional supply chains and a system that has supported U.S. growth and job creation.

On the day, the technology stocks staged a rally as technology stocks are not as sensitive to interest rates. Banks and financials suffered, however. The Stoxx rallied on the ECB comments.

Retail sales in the U.S. rose 0.8%, the largest rise since November 2017. Retails sales are robust and no doubt are a result of the recent tax cuts.

Recap. 

Equities: The S&P rose 0.3%. The Dow fell 0.1% and the Stoxx rose 1.2%.

Currencies: The Bloomberg Dollar Index rose 1%. while the euro fell 1.7% and the yen fell 0.2%.

Bonds: The ten-year closed around at 2.97%. The 2-year closed at 2.57% and the 30-year closed at 3.092%. The ten-year bund closed at 0.476% and the UK gilt closed at 1.363% and the OAT closed at 0.786%.

The U.S. curve closed the day with the following closes 2/10 at 39.6 bp, 2/30 at 51.6 bp and the 10/30 closed at 11.8 bp. The U.S. 5-year closed at 2.837%.

Commodities: WTI rose 0.5% and gold gained 0.3% and copper fell 1.1%.

Bitcoin is trading around $6,673.

Aussie Market Today.

The Aussie should be weak on the day as the U.S. dollar is strong.

Bonds could see some short covering on the day as there is a risk of increased volatility over the next few days. Equities to be similar.