Today was the day of the Big Claim or is it deception? Mnuchin claimed all the credit for the equity market’s rise and performance and that all had to do with his wonderful tax policy. And if the market falls, then it is all the fault of Congress. This raises an interesting question, how can Mnuchin claim such a thing when no one knows the policy, as it is still being formulated and discussed? Mnuchin is part right in that the equity market has rallied as a response to a possible tax cut, but that’s about all.
To date, the only policy that Trump’s administration has enacted are Executive Orders, as no legislation has been enacted. What Trump and his team have successfully done is create dislocations at times and certainly, disruption appears to be part of Trump’s policy. Take the pharma industry. All was well until two days ago when the dummy was spat over coverage for the poor and certain drugs that were subsidised. The health insurance industry sold off and so too the pharma companies. I wonder if that is also Congress’s fault?
The real issue for the GOP now is how do they get passage of any Bills. Because just when it appears as though a deal is to be reached Trump circumvents the deal suggesting he is not happy after previously supporting the Bill. For many in the GOP, it is rather confusing. With midterms due next year and with Bannon on the warpath, many sitting GOP members are uncomfortable and want to do things. The only problem is, nothing is getting done and that’s a problem.
So Mnuchin can lay claim to the steady rise in the Dow. The Dow has passed through 23,000 and we also have highs for the S&P 500. For those investors looking for a pullback in equity markets, be dismayed. If you look at 30 day volatility for the S&P 500, the volatility is about 5. This is the lowest level since 1965, that’s a little over 50 years ago. Also for the past 13 times that a year has ended is 7, the Dow has suffered a fall between August and November. Short of some cataclysmic comment from Trump, this trend now appears to be in jeopardy.
What all these people though are missing is the sheer weight of money out there. With the ECB pumping $4 tr into the system and the Fed doing likewise and the BoJ pumping $600 bio and many other central banks priming their economies, there is lots of cash looking for a home. Any retracement leads to buying and it looks like that will continue for some time.
The bond market reacted today in a somewhat offish stance. The long bonds pared back about 4 bp and that was more to do with the possibility of a more hawkish Fed. Should the new Fed Chairman be a dove, watch out, as the bonds will rally hard. The odds are though that Taylor will get the nod so be prepared for bonds to back up a bit. Part of the sell-off today came from Europe. The sell-off is an expectation that the ECB may signal a rollback in its monetary stimulus programme. Bonds in Europe were generally bp weaker in the 10 year benchmarks. NY Fed President William Dudley restated his confidence in the U.S. economy and that was enough to ignite the sell-off in U.S. treasuries.
Equities: the S&P 500 rose 0.1%, the Dow rose 0.7%. The Stoxx 600 rose 0.3%.
Currencies: The euro rose 0.2% and the pound rose 0.1%
Bonds: saw 2-years weaken 2bp to close at 2.567%. The U.S. 10-year closed 2.34% up 4bp. The 30-year closed at 2.848% up almost 5 bp on the day. The yield curve steepened about 3bp.
The U.S. bond curve closed with the 2/10 closing at 77.2 bp out 2 bp, the 2/30 at 128.bp out 3bp, and the 10/30 closed slightly wider at 50.6bp as the curve flattened between 2-years and the longer dated maturities. The 10-year European benchmarks were about 4 bp higher in yield. The gilts closed at 1.313%, the bund at 0.394% and the OAT at 0.652%
Commodities: Gold fell 0.3% and WTI rose 0.2%. Copper fell 0.6%. Zinc hit a ten-year peak this month before falling 3.1% on the day. Zinc has risen nearly 30% this year. Venezuela is running into issues related to the poor quality of its crude exports. Many of its customers are seeking discounts due to arguments over quality. Canada’s oil sands operators are stuck in a rut with oil at $50 as profits are marginal at best. OPEC is leaning towards a 9-month extension of the cut in oil supply.
Aussie Market Today.
Aussie bonds will continue to trade in a tight range and will likely sell off 4 or so points today. Equities look likely to continue the upward trend and credit looks well bid. With no bad news on the horizon, the status quo will persist.