One can now understand why Trump was so keen to exit the WTO or at least cause dissension. After imposing tariffs and chastising China, Trump now finds himself in a position where he needs to assist many farmers of the mid-West with $12 bio of Farm Aid to help those farmers weather the storm he has created.
Tariffs are the name of the game and markets will have to adjust to their views on what tariffs will be implemented and what impacts tariffs have on various countries and companies.
The treasury market has broken its restless slumber and is now looking at Trump’s comments closely. Trump’s attack on the Fed Reserve and higher than necessary interest rates has had the negative effect on bonds. With a need to fund the growing budget gap as a result of massive tax cuts, traders are starting to worry that holding treasuries has now become a lot riskier. Bond yields have risen as a result.
Meanwhile, foreign interest in U.S. Treasuries is waning. The market wants to be sold. In another piece, the share of fund managers who were holding fewer longer-dated benchmarks has risen from 23% a week earlier to 28%. The number of investors who were overweight long bonds to their benchmarks fell from 17% to 12%.
The equity market has been more sanguine in its response this week and rallied. Earnings growth for companies is solid. However, one has to adjust that much of the earnings growth is because of a change in tax rates. Further growth rates will be difficult to maintain.
Much of the recent talk has been around the yuan. The yuan fell some 0.6% and is at its lowest since June 2017. The Peoples Bank of China (PBOC) has set its conversion rates at their weakest in a year. This has raised concerns that the PBOC may be weaponizing the yuan as a response to Trump’s tariffs.
And in other news, it appears that North Korea has taken advantage of a slight thaw in relations with the U.S. and gained access to cheap fuel. The cost of fuel has almost halved. Trump, in a tweet with no evidence and no doubt in a bid to deflect, has tweeted that the Russians will back the Democrats in the upcoming November U.S. congressional election
Equities: The S&P rose 0.5% The Dow rose 0.78%. The Stoxx 600 rose 0.9%.
Currencies: The Bloomberg Dollar Index fell 0.1%.
Bonds: The ten-year closed around at 2.95% while the 2-year closed at 2.637% and the 30-year closed at 3.076%. The ten-year bund closed at 0.335% and the UK gilt closed at 1.276% and the OAT closed at 0.64%.
The U.S. curve closed the day with the following closes 2/10 at 31.2 bp, 2/30 at 43.9 bp and the 10/30 closed at 12.80 bp. The U.S. 5-year closed at 2.821%.
Commodities: WTI rose 0.9%. Gold rose 0.1%, and copper rose 2.7%. The Bloomberg Commodity Index rise 0.5%
Bitcoin is trading at around $8224. Bitcoin is at the highest level for several months.
Aussie Market Today.
Equity markets should strengthen on the day. Expect further bond weakness. However, one needs to closely monitor the Asian region trading activities as the activity will provide the day’s direction.
Geopolitical risks remain high.