Godot Again.

We are yet again in another waiting for Godot moment. Markets are waiting for something that may or may not happen and in the meanwhile the markets sit patiently waiting for something to happen. What a dilemma.

Equities rallied because China set a higher fixing level for the yuan. Does this mean the tariff war is over? No. It just means China has flexed a little muscle and global markets were shattered. Stocks looked a little more risk on however investors should not get too complacent as there is still plenty of potential for escalation of the conflict between China and the U.S.

Stocks today saw the biggest rebound for about 2-months. All major sectors advanced at least 1% and the S&P 500 Technology Index advanced 2.4%. High frequency traders were particularly active on the day. Stocks were also boosted by better than expected export numbers out of China. Volume on the exchanges was solid with 8.08 bio shares exchanged versus a 20 day moving average of 7.2bio shares per day.

Equities rallied as treasuries held their ground.

Once again, the Fed is in a space it probably does not wish to be in. Investors are flocking to the stability that the dollar offers as fears of a downturn in equities and recession continue. The U.S. treasury curve is continuing to invert but the curve suggests moderate stress rather than severe. The current inversion is now more sever than the mid-cycle slowdowns in 1995, and 1998. However, what is causing concern for the Fed is that the curve has continued to invert despite a 25 bp easing. Fed funds futures are implying rate cuts of up to 75bp by year end. The flight to safety remains orderly and credit spreads remain relatively steady and that’s the way the policy makers would want things to be anyway. The Fed’s hands are tied, and it will likely have to cut rates if the data continues to be weak.

Treasuries continue to be bought as safe haven assets and that’s the story of the day and why the treasury market was steady even though equities staged a good rally. Italy did not help as Mateo Salvini (Italian Deputy Prime Minister) said the country’s governing coalition had broken down. The 3-month bill versus 10-year treasury closed at 29 bp after touching 40 bp the previous day. The 30-year treasury was a tad weaker because of weak demand for the day’s 30-year auction. Don’t be dismayed as 61.33% was bought by indirect bidders including central banks and money managers. This was their biggest share since December 2018.

The number of Americans filing for unemployment benefits fell 8,000 seasonally adjusted to 209,000 for the week. For investors the GDP data is the next major data point. The second quarter GDP is expected to be revised down. The wholesale inventory component edged up in June suggesting that the pace of accumulation was slower that had been previously expected. The GDP estimate will be published on August 29.

Oil rebounded after the Saudi’s met with a number of producers to discuss options about how to stem the fall in oil prices.Interestingly the Saudi’s are looking to forge stronger ties with Russia and are looking to buy Black Sea wheat, bugs included. The Saudi’s are relaxing their bug damage specification to allow wheat imports. The biggest exporter of wheat to Saudi is Germany and it is expected that Germany will not be able to compete with the Russian wheat. Russia traditionally dominates those markets where its wheat is allowed. Russian wheat is cheap and has the advantage of low shipping costs. This is yet another blow to the ailing German economy.

The Rant.

Investors seeking relief from the mountain of negative yielding assets in Europe are providing a boost to Europe’s direct lending market. Demand is coming from investors who are looking for higher yielding assets in an ultra-low interest rate environment.

In an environment of $15 tr of negative debt a product that offers high single digit returns looks attractive. Recently a direct lending fund closed after raising 1.5 bio euro, this ois the second fund of this type and investor demand remains buoyant. Barings, Alcentra Capitalk Corp and LGT Capital Partners AG have all announced European funds worth 1 bio euros or more since the start of July. GSO Capital Partners LP are targeting a 6bio euro fund raising.

It all sounds too easy and at present it is. Investors need to be wary of risks stemming from the illiquid nature of the assets, and weak underwriting standards.

Market Recap.

Equities: The S&P 500 rose 1.88% The Dow rose 1.43%. The Vix closed at 16.91. The Stoxx Europe 600 Index rose 1.7%.

Currencies: The euro fell 0.1% The Bloomberg Dollar Spot Index fell 0.2%. The yen rose 0.3%. The Aussie dollar gained 0.7%.

Bonds: (as at 4.30pm). The ten-year is trading at 1.719%. The 2-year is trading at 1.617% and the 30-year is at 2.229%. The U.S. curve closed on the day with the following closes 2/10 at 9.6 bp, 2/30 at 60.3 bp and the 10/30 closed at 50.5 bp. The U.S. 5-year closed at 1.544%. The 2/5 spread is now -7.6 bp. The ten-year bund closed at -0.559% and the British gilt closed at 0.524%. The 10-year yen gilt is trading -0.19%. The 10-year OAT (France) closed at -0.278.

Commodities: Gold rose 0.1% and WTI rose 3.2%.

Bitcoin is trading around $11,676.

Aussie Market Today.

Stocks to rally on the day. The news out of China was positive and that was what led to a turnaround in trading. Expect the day to be solid.

Bonds will probably be a little weaker on the day. As equities rally we will see more risk on trades and that won’t be so good for bonds. Expect a little volatility on the day.

Credit should rally on the day. We are seeing solid offshore demand whilst domestic investors have remained sidelined. Expect credit to trade a little tighter on the day as equities rally.

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.