Chuff away.

The ECB inspired a rally on Thursday evening and that was followed up with a bedrock of data and commentary. Lael Brainard (Fed Governor) was dovish in her comments and even suggested that the next move by the Fed could be lower.

All one has to do, for instance, is to look at the Fed Funds Futures on the CME to note what bond traders have thought and are thinking with a 52% chance of a cut in January 2020. The data that moved the markets was the Chinese trade data with Yuan denominated exports falling 16.6%. German industrial orders were down 2.6% when the expected fall was 0.5%.

Bunds and Treasuries rallied before pulling back to higher yield levels. Treasuries on the day also staged a shallow rally on weak jobs data. The jobs data was a little misleading though with wages up 0.4% and unemployment fell to 3.8%.

And amongst this cornucopia of data is a view held by some that the Fed may be about to reintroduce quantitative easing to boost the flagging U.S. economy. A number of larger funds are now starting to position their funds that way.

Nowotny (ECB) spoke Friday justifying the actions of Thursday whilst the Norwegian sovereign wealth fund commented that it was exiting a variety of oil investments. This impacted oil by pushing Brent lower. Commodities were battered on the day. Nickel was down 0.6%, zinc down 0.9%, copper down 0.7% and gold rose 0.9% in the uncertainty. The CSI 300 was down 4% and the Stoxx 600 was down 1%.

The alarm in the markets is a result of trade issues and Trump’s behaviour has not assisted. The Chinese are fearful, for example, that after agreeing on trade with the U.S. that Trump could suddenly stall the agreement by pulling out and thus embarrass President Xi Peng.

The Vietnam experience between Kim Jong-un and Trump has resonated through the Chinese hierarchy and especially so on foreign policy. The issue is one of trust and the Chinese are fearful of Trump’s tactics.

The S&P 500 Index closed down slightly to record the worst week for the year. The decline over the week was 2.2%, the worst since December. China’s stock market fell the most since October 2018 after a rare sell rating was provided by the Nation’s largest brokerage. The sell rating was seen as a sign that the government wishes to curb gains.

And investors are now waiting for some fresh good news. However,  the data is all pointing in the wrong direction and stimulus is required. The ECB delivered a fresh stimulus Thursday with the ECB also downgrading growth forecasts for Europe. China cut its economic expansion goal, the Bank of Canada dialled back its tightening policy, and the OECD lowered its global outlook.

Within the gloom, bright spots are appearing. Japanese bonds are looking attractive as currency swaps make yen gilts more attractive than European bonds.

Brexit is causing some headaches in the bond market.  Investors are uncertain over how to treat bond defaults and bank restructurings after Brexit. In an effort to remain compliant post Brexit, a number of issuers have now been issuing with laws governed by laws the other 27 EU members.

The English system was seen as neutral for resolving disputes and this change in law could provide headaches. Investors must now check the jurisdiction. For example, both Portugal and Greece using their local jurisdiction have shown how easy it is to wipe out bonds under the local legal system. Investors must now monitor which legal system the bond is being issued under. The other main legal systems, the U.S., Germany, and France are strong, but some others are not so strong.

 

Market Recap.

Equities: The S&P 500 fell 0.2%. The Dow fell 0.1%. The Vix closed at 16.05. The Stoxx was down 0.9%.

Currencies: The Bloomberg Dollar index fell 0.3%.  The euro rose 0.4%, and the pound fell 0.6%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.63%. The 2-year is trading at 2.467% and the 30-year is at 3.013%. The U.S. curve closed on the day with the following closes 2/10 at 16.50bp, 2/30 at 54.7bp and the 10/30 closed at 38.bp. The U.S. 5-year closed at 2.432%. The 2/5 spread is now -3.5bp. The ten-year bund closed at 0.071% and the British gilt closed at 1.196%. The 10-year yen gilt is trading -0.033%.

Commodities: WTI fell 1% and gold rallied to close up 1.2%.

Bitcoin is trading around $3,900.

Aussie Market Today.

Equities, if they follow the trend, are likely to be down. Global growth concerns and falls in commodities are likely to cause a loss of momentum. Today feels like a risk-off day and unless we get some positive news out of Asia it is hard to see any substantive gains being made.

Bonds look likely to continue the rally. As long as growth concerns persist and with dovish comments out of the ECB and the Fed, bond markets globally are looking set to rally. It’s just a matter of when the central banks start to loosen the monetary policy strings further.  An agreement between the U.S. and China would scuttle the bond traders hopes but any agreement appears to be some distance.