Equity markets continued their run as fears over the impact of a trade war abate. U.S. equities rallied because economic growth – as a result of the tax cuts – continues and the Chinese appear to be unwilling to introduce more tariffs. And probably nor should they, after all the political cycle in the U.S. is to their advantage and the impact of the tax cuts will wear off as we move into 2020. The Chinese can wait and restructure their economy in the meantime.
Trump has a point about tariffs and the impact on the U.S. economy. Since their introduction, the U.S. equity market has rallied 10% and the Chinese market has fallen 16% in broad terms. The growth rate in the U.S. economy is the fastest in four years, unemployment is the lowest since the 60’s and the economy is enjoying its second-longest expansion on record. What is there not to love? And equity markets are showing the love and rallying. However, the major difference between the two countries is that China is retooling and upgrading whilst many U.S. companies are now scrambling to find new supply chains.
China meanwhile has softness. Growth in the first eight months has fallen and the economy is growing at the slowest pace since 1999. The yuan is down 8%. The Chinese, as outlined by Premier Li Keqiang, are relying less on debt and are shifting to a growth model. This has meant looser capital requirements for banks and massive infrastructure spending globally. China can wait, the U.S. cannot.
All this meant is that much of the angst in equity markets has dissipated. Why worry about the future when you can have fun today? And that sums up the equity market rally today. The S&P 500 Index saw 28:30 constituents up, led by technology, healthcare, and the finance sectors. The equity markets are comfortable with rates where they are and are really more concerned with growth prospects. Frankly, the U.S. economy is strong and the equity market is reflecting that strength. As the emerging markets stabilise, this should lead to further strength in the equity market.
Bonds are in quandary. Much of the trading of late has been technical driven with little interest being shown in data, news or risk on risk off impulses. Supports have been tested and these have withstood the onslaught. This meant short covering, curve unwinds, and movements in the swaps basis. Overall, this means that bonds are in a good place and if anything the bias is neutral. However, let’s hope the market does not end up like a cheap date. Debt levels encouraged by cheap money in the U.S. are ballooning. Corporate issuance this year to date is at a record $6.3 tr according to S&P Global.
However, much of the current growth is being driven by low to low middle-income earners and this is the problem. The bottom 60% rather the top 40% of earners are responsible for growth this time. Expenditures for the bottom 60% have increased whilst the top 40% have been building a financial cushion. Signs of financial fragility are increasing and this shows up in the Fed’s Well Being Survey. The survey highlights that 1:4 cannot cover an unexpected expense of $400 whilst 1:5 struggled with the monthly bills. Yes, unemployment has fallen but the safety net in savings is not there. This points to problems should the economy slow and unemployment rises. The year 2020 could be a cathartic year if this all comes to pass.
We could see some argy bargy out of the UK as negotiations for Brexit loom. EU leaders will be pushing for an agreement next month, and have told May that the UK has to give ground on trade and the Irish border by November and can cope with the UK crashing out.
Canada and the U.S. are showing few indications that a deal on trade is imminent. Canada has been very strong in its resolve to have the threat of auto tariffs withdrawn. The U.S. wants Canada to cap exports to 1.7 million vehicles. This does not make a lot of sense as car makers are unlikely to increase production in the U.S. whereas production is likely to be increased in Mexico given the low costs. It’s all a little bizarre.
Equities: The S&P rose 0.8% and the Dow rose 1%% while the Vix closed at 11.80. No fear in the Vix.
Currencies: The Bloomberg Dollar Index fell 0.4% and the euro rose 0.9%.
Bonds: The ten-year closed around at 3.088%. The 2-year closed at 2.808% and the 30-year closed at 3.21%. The ten-year bund closed at 0.474% and the OAT closed at 0.793%. The U.S. curve closed on the day with the following closes 2/10 at 25.5 bp, 2/30 at 37.8 bp (strong flattening move) and the 10/30 closed at 13 bp. The U.S. 5-year closed at 2.955%.
Commodities: WTI fell 0.4% after Trump tweeted about OPEC. Gold rose 0.3% and the Bloomberg Commodity Index gained 0.6%. Copper continued its slide, falling 0.6%.
Bitcoin is trading around $6,376.
Aussie Market Today.
Equities should see another up day. With fears dissipating around trade, equities can rally. Our next point for markets will be global growth and the impact on growth from the tariffs. With the Vix declining and similarly in Australia, fear is evaporating and that is conducive to higher markets. As always, watch for commentary around tariffs and China. Especially today as it looks as though the Aussie equity market got things wrong.
Who loves a bond? No one today, I think. Today looks likely to be risk on and there will be some squaring but overall I expect traders to favour short positions.
The Aussie dollar improves as the tone for commodities improved. The Aussie appears to be on a roll and that could last for a while yet as China is looking to keep its economy growing.