Some days you win, other days you lose and that pretty much sums up today’s activity. Equities lost ground. Why? Because some details of the tax plan disappointed. The lowering of corporate taxes won’t apply until 2019.
Tech shares also dragged the equity markets lower. And it was those shares that had dragged the indices higher over the past 10 days that slumped the most. Maybe we saw some profit taking in those shares.
Corporate credit also widened as the glut of issuance continues. The starkest declines, unsurprisingly, were in the lower rated securities. In addition, volatility spiked on the day as investors ponder what may be as Congress grapples with putting together a coherent tax policy.
The yield curve steepened on the day by about 3 bp, and that was due primarily to the 2-year bonds rallying a couple of points. The 30-year auction at current levels was lacklustre and this set the tone for the rest of the day. The sell-off in bunds also led the European bond markets lower in price, higher in yield. Concerns about demand for new issuance of between euro 25-30 billion was seen as the primary cause.
Equities: the S&P 500 was down 0.6% and the Dow was flat at down 0.44% while the Stoxx 600 fell 1.1%.
Currencies: The euro rose 0.5 % and the pound rose 0.3% but the Bloomberg Dollar Spot Index fell 0.4%.
Bonds: the 2-year rallied in yield to close at 1.63%. The U.S. 10-year closed 2.33 % in about 2 bp. The 30-year closed at 2.807 %. The curve steepened between 1 and 3 bp depending on the maturities. The 2/10 closed at 69.4, the 2/30 at 117.3 bp and the 10/30 closed at 47.7 bp. The European 10-year benchmark closes were, gilts closed at 1.265%, bunds at 0.377% and OAT’s 0.592 %.
Commodities: Gold rose 0.5% and WTI rose 0.6% while copper fell 0.3%. Palladium hit a 16 year peak before retreating. Palladium is benefitting from the switch from petrol driven cars to hybrid cars.
Aussie Market Today.
Bonds are likely to be sold on the day. Credit could widen a touch. However, there is strong demand for credit at present. What is interesting to note is the difference between FRN issuance and fixed rate issuance in new issues. At present, there appears to be more demand for floating rate notes and this may be a defensive measure as investors fear rising rates.
Geopolitical tensions are still a concern although tensions appear to have been cowed for the moment.
Equities are likely to take the lead from the U.S. and sell down a little. It is Friday and some profit taking can be expected.