Once again, the Fed came to the rescue of the markets and in its own language laid out the reasons why markets should be so cheerful. For one the dividend discount model is still relevant. Stretched PEs are no longer required for callisthenics as they are no longer stretched. We can all sleep much better in full knowledge that inflation is not raising its ugly head any time soon. We pored over the minutes, we parsed every phrase and word, we ran the algo’s to tell about changes in language. There was nothing to discover other than the Fed was split. Inflation remains below the target rate and that a hike in rates is not due probably this year. The Board once agreed to monitor inflation.
The probability of a rate hike this year by December has now fallen to 31%. Bonds and equities have reacted accordingly. Inflation has cooled and the big discussion in the markets was when the winding up of Tarp would commence. In the Minutes, we are told to expect an announcement in September. The gabfest in Jackson Hole starts shortly and maybe we will get a guide then as to when the Fed will start unwinding its balance sheet and if Draghi also harbours similar ideas. (Draghi is not expected to deliver a speech at Jackson Hole it has been reported, however that relates to new policy)
With Trump and li’l Kim no longer rattling sabres international markets are more relaxed with money flowing into Europe. Brexit is now becoming more relevant and as bankers start to move into Frankfurt. With property prices and building construction booming, many Frankfurtians are now saying “nein”. All of a sudden Bankers are no longer welcome.
In another twist, Trump once again proved he cannot work with anyone if they are not an employee. He disbanded his CEO business council after several members resigned following his Charlottesville remarks. And in yet another twist, with the looming debt ceiling and possible Government shutdown on September 29 we are hearing no words from Mnuchin or Cohn (slated to replace Yellen) regarding how the Government will be funded and policy relating to taxation and infrastructure. And yet in another missive Trump took aim at Bezos after his Washington Post posted a critical story about Trump.
Trump has to learn that Government is not a private company nor is he king. Charlottesville could end up being a disaster for the GOP as the GOP has been relatively muted in its criticism of Trump and his support of alt -right extreme groups. Once again Trump’s Administration is being questioned as to whether it can get anything done and calls into question tax and infrastructure reform.
The USD was weaker against a basket of currencies. The USD Dollar Index fell 0.36%. The dollar is being affected in several ways. Money is flowing into Europe because of better economic growth and geopolitical risk is waning. Also, it is unlikely the Fed is going to hike anytime soon. The pound’s slide continues with some analysts believing it could converge to the euro. NAFTA talks continue to pose problems for the loony and peso as talks drag on with little chance of a resolution anytime soon.
Equities and Bonds Recap:
The equity market was sluggish. The Dow rose 0.1%, the S&P rose 0.1% and the Stoxx 600 rose 0.7%.
Bonds rallied on the back of the Fed Minutes. With interest rate hikes not due anytime soon and the inflation genie firmly contained in its bottle, bonds staged a muted rally. The 2-year note rallied 2 bp to close 1.33%, the 10-year closed at 2.225% and the 30-year closed 2.807%. The curve flattened about 2 bp. The 2/10 closed 89.2bp, the 10/30 closed 58.3bp (out 1 bp) and 2/30 closed 147.7 in 2 bp. The euro 10-year benchmarks were out about 2bp, with the bund at 0.438% the OAT at 0.735% and the gilt at 1.109%. U.S. home construction fell 4.8% in July raising fears of the strength of the housing market in the 3rd quarter.
Commodities were mixed. Zinc hit a high after surging to the highest price in a decade up 5.4% on the day. It is believed that Chinese traders have been buying zinc after a hike in steel fees by the Shanghai Futures Exchange. Copper rallied 2.9% and aluminium hit a 3 year high. WTI fell 1.7%.
Aussie Market Today
Australia continues to make a mockery of itself after creating a constitutional crisis of its own making. Julie Bishop has declared war on the Kiwis in the wake of Joyce being a Kiwi by parental citizenship. This should provide the Wallabies enough incentive to bash and beat the hapless All Blacks.
Unfortunately, this won’t be the case and for this poor rugby tragic he will have to watch yet another belting of the Wallabies by the AB’s. The constitutional crisis is a problem as the Government controls the Lower House by one vote, hence if Barnaby resigns the government flounders. It is not causing any major jitters yet but could if policy is jeopardised or Joyce is forced to resign.
On the day however equity should stage a small rally and bonds will be slightly better on the day.