Bumbling Stumbling Market.

The day started with the news that Facebook had set a record. A record that most would not wish to have, the single largest fall by a stock in American history. The stock lost $119 bio after tumbling 19%. The obvious reason being security and the unauthorised release of data. Users and usage have declined and as a result, advertisers have fled.

With all eyes on the EU/U.S. trade truce, the equity market cheered the result.  However, the threat of a trade war has caused a setback in a number of industries and it will take time before these companies can recover. There are some green shoots, however, in the U.S. economy. Orders for U.S. capital goods increased in June as shipments surged. Core capital goods rose some 1%. GDP expectations for the second -quarter may miss the mark as the Commerce Department reported a slump in exports. The goods trade deficit rose 5.5% in June to $68.3 bio. Inventories were flat.

The big news though appears to be coming from Japan and Europe where the respective central banks are making noises about rate moves. The ECB suggested that it would hold rates steady and possibly look to commence hiking next year. The news led to some selling of bonds across various time zones. This is interesting, as for the moment, rate movements in Europe are leading the direction of bonds in the U.S.

On the day, Draghi suggested that the ECB was committed to keeping interest rates low.  The euro fell as a result and bonds rallied to a small extent. The ECB is confident on recovery and were pointing towards inflation.

For equity funds this year and especially the last month or so, the exodus of redemptions has increased. Over the month some $20 bio of money has been pulled from long-term mutual funds and exchange -traded funds. This exodus coincides with Trump’s tariffs. Russell Investments reiterated their underweight call on equities as sentiment struggles with tariffs and the persistence of growth and whether that growth can continue. In Europe, stocks surged on growth expectations following Trump’s announcement relating to trade.

This is all interesting.  However, the bond market appears to be not pricing in the $200 bio of Chinese tariffs. A confrontation of the size suggested by Trump would see corporate spreads widen considerably and that simply has not happened. Bond investors would also believe that the imposition of tariffs of this magnitude would lead to a recession and a recession is not being priced into the market. The average spread between treasuries and junk bonds could possibly widen 80 bp over the current spread of 350 bp and possibly about 200 in a full -blown trade spat.

Currently, junk bonds are trading within a 60 bp range and are currently 11 bp tighter year to date (BAML Data). The base case scenario for a major trade dispute with China could see depressed profits increased market volatility and rising default rates. About 15-17% of U.S. corporate debt would be affected (as reported by UBS ).

Market Recap:

Equities: The S&P fell -0.30%  while the Dow rose 0.44%.

Currencies: The Bloomberg Dollar Index rose 0.5%.

Bonds: The ten-year closed around at 2.982%. The 2-year closed at 2.69% and the 30-year closed at 3.104%. The ten-year bund closed at 0.341% and the UK gilt closed at 1.28% and the OAT closed at 0.634%.

The U.S. curve closed the day with the following closes 2/10 at 29 bp, 2/30 at 41.4 bp and the 10/30 closed at 12.2 bp. The U.S. 5-year closed at 2.865%.  The U.S. yield curve is back on a flattening trend. Credit has also been tightening over the week with the Aussie Itraxx in some 8 bp over the week.

Commodities: WTI rose 1.1%. Gold rose 0.5% and copper fell 0.39%

Bitcoin is trading around $7929.

Aussie Market Today.

Equity markets should strengthen on the day.  However, the day will be mixed. Expect further bond weakness. However, one needs to closely monitor the Asian region trading activities as the activity will provide the days direction.

Geopolitical risks remain high.