Reality bites.

The global economy has a fever and it’s all because of the U.S. stance on trade. The global economy is slipping as Trump wages a universal war on trade. Equity markets are suffering as well. U.S. stocks have slipped to a 12-week low. The U.S. 10-year had a think around 2.20% before backing up to 2.26%. The curve between 3-month bills and the 10-year slipped to -13bp.

Maybe, just maybe investors are starting to wake up and understand that through all the bluster, a trade deal cannot be done on a whim. Trade tensions are also escalating rather than diminishing. And it’s all because of the way Trump and his team are chastising friend and foe alike. Trump has suggested he will attack Europe with tariffs because of a legal mechanism that allows Europe to trade with Iran. Remember Iran has a nuclear deal with Europe and has pledged not to continue in an arms race.

The U.S. cut its deal and has imposed sanctions on Iran, so it is protecting its position through the threat of tariffs and especially so on cars. Meanwhile, China is looking at cutting exports of rare earths in an attempt to stymy Trump’s tariffs and hit the tech sector, aircraft and automobile sectors. Deposits of rare earths are plentiful but not many have been developed and as such China has a definite advantage.

Talking stocks, the 11 major S&P 500 sectors were negative. The Nasdaq fell 0.79%, the Dow fell 0.87% and the S&P 500 fell 0.69%. Johnson & Johnson fell 4.19% after a lawsuit was lodged accusing the company of fuelling the opioid epidemic. Volume was good with 7.31 bio shares exchanged on the exchanges.

Of further concern for the U.S. is the lawsuit that Huawei has issued against the U.S. government. The company has filed a lawsuit seeking to declare that the defense law imposed by Trump and his team is unconstitutional.

For all the bluster of the day, it was a definite risk off day with the dollar stronger, gold stronger and oil weaker.

For bonds today, it was the heady smell of fear that spurred the market on. An article in the Chinese newspapers set the tone and that was the story relating to rare earths being used by China as a retaliatory weapon. The curve inverted between 3-month bills and 10 years and once again fanned fears of recession. Of interest at these levels and considering the state of fear in the market, the 7-year auction was weak.

Primary dealers took their largest slice in March 2018 indicating weak demand from mutual funds, central banks and other investors. The 7-year note was auctioned at 2.144% the lowest level since September 2017 and was issued at 2 pts higher than what the “when issued” trading indicated. A rather poor result. Interestingly, the 2-year and 5-year auction held Tuesday saw strong demand, albeit at higher levels.  The U.S. bond market appears to be now factoring in a 50bp rate cut.

The UK gilts rallied on the day and fell to the lowest level since October 2016. The 10-year gilt closed at 0.904% after trading to 0.894%.

The Rant.

For those interested in what the impact of rare earths could mean, here is a little insight. The U.S. defense forces account for 1% of U.S. demand and that in turn accounts for 9% of global demand for rare earths. Companies such as Raytheon and Lockheed Martin use the minerals in missiles in the guidance and sensors. Some earths are used in lasers such as yttrium, and neodymium. Lanthanum, for example, is used in night vision goggles.

In a subtle twist, the only operating rare earth mine in the U.S. ships its concentrate for the U.S. to China for processing. China has imposed a 25% tariff on these imports. For the California based Mountain Pass mine, this is a dilemma.

If you are feeling confident about global growth, then have a gander at the cost of shipping and shipping demand. Both have fallen significantly over the past few months with ships now looking for non-existent cargoes.

In a bizarre twist, corn futures on Chicago headed for their biggest three-day advance amid concerns that heavy rains and flooding will prevent farmers from planting. There are also concerns that many U.S. soy farmers may choose not to plant any beans this year with the lowest rate of planting since 1990 being planted to date. At present only 58% of the nations corn crop has been planted. Corn prices rose 4.2%.

Market Recap.

Equities: The S&P 500 fell 0.69%. The Dow fell 0.87%.  The Vix closed at 17.9. The Stoxx Europe 600 Index fell 1.4%.

Currencies: The Bloomberg Dollar Index rose 0.3%. The euro fell 0.2%.  The yen fell 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.262%. The 2-year is trading at 2.109%. The 30-year is at 2.693%. The U.S. curve closed on the day with the following closes 2/10 at 15.1 bp, 2/30 at 58.3 bp and the 10/30 closed at 43 bp. The U.S. 5-year closed at 2.07%. The 2/5 spread is now -4.00 bp. The ten-year bund closed at -0.178% the lowest level in 3 years. The British gilt closed at 0.895%. The 10-year yen gilt is trading -0.091%.

Commodities: WTI fell 0.6%. Gold gained 0.4%.

Bitcoin is trading around $8,655.

Aussie Market Today.

We appear to be in a risk off period. Unless Asia sees something that is positive, it is hard to see how the equity market will rally to any significant degree. Concerns are mounting over trade between the U.S. and China but also the U.S. and Europe.

Bonds are and will be on the bid today. The bond movements last night suggest a rally of about 7-8 bp. Of concern for the local market is if the Fed cuts again that the RBA will most likely cut as well. And this is the dilemma for any bond fund manager. Rates are around the lowest levels on record and those levels were some 100 years or so ago. Risks are certainly rising but this fear has to managed in the context that rates could remain around these low levels for some time. What to do? And it’s not just here.

Demand for credit in the shorter terms appears to be well bid. This trend should continue for a little while as investors prepare for the RBA’s June Board meeting and whether monetary policy will be adjusted.

Geopolitical risks remain high and still need to be monitored.