Today’s rally in the equities market was somewhat curious. Much of the recent market moves can be attributed to discussions around tariffs not impacting the U.S. economy and two rate hikes by the end of the year.  Curious, this is very curious.

It appears as though the concerns about inflation are out the door despite an expected 0.3% rise in wages to be reported in the jobs report. Even more curious is that if the economy is growing at the required 3% the new Pareto rate, then one should expect more than 2 rate hikes by the end of the year.

Even more curious was that in all the tariff discussions, the Trump Administration thought that China was bluffing when it said it too would retaliate if the U.S. applied tariffs to Chinese goods.

So why did the equity market rally again? Oh, that’s right it was because Trump is softening his tone with China and NAFTA but he is still waging a war of words with the Europeans and why they can sell goods in the U.S. and why Europeans won’t purchase too many U.S. goods.

The equity markets rallied globally in response to the U.S. maybe not being so hard on tariffs and that any imposition of tariffs won’t hurt the global economy.

Once again this is curious because no one knows just what goods will attract a tariff. This tariff spat still has a long way to go. The risk on investors had a good day.

Even technology stocks shunned a week ago, found demand today. The rally is predicated on global growth remaining strong, but will it remain that way? That is the question that will be answered over time.

The bond traders licked their wounds and retreated to their caves. Bonds weakened a couple of pennies but are primed should the jobs report disappoint or indicate strong wages growth. Repo rates have fallen and that means there may be a few shorts out there. Whilst bonds across the pond also weakened with bunds up a few basis points and the Italian 10 year rose some 4 bp to close at 1.77.

If the jobs report does not disappoint, then the momentum is for higher bond yields. Even if the Fed hikes twice again this year,  3.25% is quite possible. An extra hike could catapult 10-year bonds to 3.5%. These expectations are all predicated on growth around 2.8% and inflation around 2%.

What happens if inflation stays around 2% but only growth of 2.5% is achieved?  Then the deficit becomes a huge problem and servicing the interest cost is more than the spend on the military.

The deficit is growing and requires the necessary tax receipts to hold everything in check. If we don’t have inflation, then there is a problem because bonds then have to move higher and the currency weaken to attract capital.

Meanwhile, Thursday was a risk off day. Equities rallied in response to maybe tariffs not hurting the global economy and as sure as night follows day this saga won’t end anytime soon.

What is curious is that a week ago discussions were revolving around 4 rate hikes and the economy growing at 3%.  But this week many analysts now have 3 rate hikes for the year and the economy growing at 3%. Something is just not right.



Equities: The S&P 500 rose 0.69%. The Dow rose 0.99%. The Vix closed at 18.94, a very strong bullish signal given where the Vix has been of late. The Stoxx 600 surged 2.4% and this was partly catch-up and partly a rally because today was risk off.

Currencies: The Bloomberg Dollar Index was down 0.1%

Bonds: The ten-year closed around at 2.834%. The 2-year closed at 2.307% and the 30-year closed at 3.07%. The ten-year bund closed at 0.524 and the UK gilt closed at 1.415% and the OAT closed at 0.756%. The U.S. curve closed 2/10 at 52.5 bp, 2/30 at 76.6 bp and the 10/30, closed at 23.9 bp. The U.S. 5-year closed at 2.64%.

Commodities: WTI rose 0.4% on. Copper rallied 1.8%.

Bitcoin is trading around $6,727.93.


Aussie Market Today.

Today could be seen as a risk on day. Equities should rally if there are no hiccups relating to tariffs. The market is very much in risk off mode. The counter is that tonight Friday (NY) sees the release of the jobs report and that could mean a bit of book squaring ahead of the weekend or no new fresh positions.

Bonds look set for an interesting day. The morning session is likely to be mixed ahead of the weekend. Fresh shorts are unlikely to be added.  However, we may see some squaring later in the day to help the bond market rally towards the close. Expect some volatility on the day. Credit looks set to hold steady for the time being.