Central Banks came riding out of the dust and saved stocks from themselves. In what appeared to be a loose collation of easings, New Zealand, India and Thailand unexpectedly eased today and those actions were seen as sufficient to turn what looked like a bearish ugly market into a one where the outlook looks rosy.
Global markets are looking to easier monetary conditions despite the Fed’s slightly hawkish stance of a week ago. On the day the yuan dipped slightly below its reference rate, whilst the baht and rupee also slipped on the day.
Bonds were a confused lot on the day. The 30-year continues to tumble towards record lows on fears of a global economic slowdown turning into a full-blown global recession. Bond yields in Germany are now at record lows. Not all is rosy, however. The 10-year auction was not as well bid as expected however the yield was the lowest since October 2016. The Interest rate futures have the Fed cutting three more times by year end to avert a recession. The spread between 3-month bills and 10-year bonds is now 39bp a level not seen since March 2007. The Chicago Fed President Charles Evans waded into the daily news commenting that he was open to lowering interest rates to counter trade war risks and get inflation higher.
The 10-year gilt broke a past record low on the day dating back to August 2016and hit a fresh low of 0.432%. Twenty-year gilts fell below 1% for the first time on record. German industrial production fell 1.5% in June. Yet another sign that Europe’s biggest economy continued to contract in the second quarter and the first half of the year.
The story of the day was the equity market. Stocks recovered from steep early losses as bonds rallied from earlier losses in the day. Financials were the biggest loser on the day down 1.2%, however staples and materials indexes were each up more than 1% respectively. Energy was down 0.8%. CVS (drug stores, pharmacies) was up 7.5% after it raised its full-year profit forecast. Volume on the exchanges were strong with 9.05 bio shares being exchanged compared to a 20-day moving average of 7.1 bio shares.
Just when Jerome Powell thought that he had the measure of markets and showed that he would not be bullied, markets have once again bullied the Fed. When Trump upped the ante with China to send markets into a tailspin the Fed was always going to have problems.
The result has been the tightening of financial conditions has diminished any good work the Fed has done. Goldman Sachs Group Inc’s index that measures stress based on levels of the dollar, stock prices, spreads, and treasury yields has Monday’s rout equivalent to a 25bp rate increase. The Fed now finds itself behind the markets as Trump has escalated the tariff spat with China.
For markets the comments by Bullard are sobering. The St Louis Fed President believes only one more rate reduction is required and tis is at odds with interest rate traders and stock traders alike. His comments suggest that if financial conditions are the sole driver of how the Fed impacts the economy then Bullard’s comments suggest that risk assets are in for a shock, they may be priced too keenly especially he believes that financial conditions are too easy.
Equities: The S&P 500 fell 2.98% The Dow fell 2.90%. The Vix closed at 20.17. The Stoxx Europe 600 Index rose 0.2%.
Currencies: The pound fell 0.2% The Bloomberg Dollar Spot Index was unchanged. The yen rose 0.2%.
Bonds: (as at 4.30pm). The ten-year is trading at 1.721%. The 2-year is trading at 1.603% and the 30-year is at 2.24%. The U.S. curve closed on the day with the following closes 2/10 at 12.4 bp, 2/30 at 64.3 bp and the 10/30 closed at 51.8 bp. The U.S. 5-year closed at 1.542%. The 2/5 spread is now -6.0 bp. The ten-year bund closed at -0.579% and the British gilt closed at 0.481%. The 10-year yen gilt is trading -0.195%. The 10-year OAT (France) is now -0.311.
Commodities: Gold rose 2.0% and WTI fell 2%.
Bitcoin is trading around $11,905.
Aussie Market Today.
Stocks to rally on the day. The trend for the moment remains uncertain and the outlook choppy. That said rate cuts and a markets expectation of rate cuts should mean the equity market has further to run.
Bonds will most likely be steady. Last night binds started weak and ended the day stronger. We may see this trend continue locally. Bond most likely will drift on the day and depending upon what is said is most likely to stage a small rally.
Credit should rally on the day. After backing up some 13 bp over the last few days, an equity rally will give some confidence for investors to buy credit. Either way credit looks an attractive proposition with cash rates at 1%.
At least one more rate cut is still expected.
Geopolitical risks remain high and still need to be monitored. Watch developments out of Hong Kong as the protests have a real chance of upsetting sentiment in the region.