SOMETHING STRANGE HAPPENED.

The world suddenly became flat. What happened? After raging against the TPP ever since it was introduced, Trump is suddenly a supporter. Kudlow has now become the Trump whisperer. This is a significant change in the Administration’s thinking and goes a little against the Trump supporter base.

After raging how unfair the TPP was to U.S. interests, Trump suddenly wants a seat again at the table. Whatever happened is good, but as we know with all things Trump it all depends on the day and mood.

On the same day when the Trump administration saw good in the TPP,  the Administration said that perhaps they won’t impose any tariffs or penalties on China. This is interesting because China has said it won’t negotiate whilst being threatened and released a comment that suggested the Chinese Government had a very definite response on how to confront the U.S. over trade.  In response to the possibility of no tariffs and possibly rejoining the TPP,  the risk on trades erupted.

The Dow gained 1.2% and the S&P rose 0.8%. Equity investors can now focus once more on company reports and analysis. To further that view, Paul Ryan has decided to leave Congress. This is important in some ways. The theory is that with Ryan’s retirement, the Democrats can gain a majority. If the Democrats get a majority, then nothing gets done.

The Wall Bill fails, and a host of Trump bills fail and that’s good for business. The Democrats won’t try and raise taxes. Nothing happens, the markets have stability, Trump still has his veto and can change things, but nothing happens. Markets get stability.

What markets should be focusing on, however, is the flattening yield curve. The flatness of the curve and the inability of the 10-year to pass through 3% possibly suggests that the Fed is about right where it needs to be.  And that’s a problem.

The boost that was to have arrived from the tax dividend has not translated into productivity which feeds into growth. Simply put, much of the dividend has been spent or been allocated towards increased dividends and share buy backs.

The money has not gone to productivity, economic expansion or capex, and that’s the worry. The flatness of the curve probably suggests that the economy can possibly grow at or around 2.8%-3%.  However, that’s only a short-lived growth spurt.

At some point, the ballooning deficit becomes an issue.  And so too the ballooning interest payments, meaning cuts will need to be made elsewhere or taxes raised.

For the moment, bonds are trading off political and international headlines. Economic data is not all that relevant at present. This has kept trading ranges tight given the overall market uncertainty even though the trend suggests higher bond yields.

The 10-year note sale drew soft demand from “indirect bidders”.  This clearly suggests that Funds and foreign central banks are not that keen to invest at present. The $13 bio auction of 30-year notes drew soft demand and went off at 3.044%,  just below the expected level. The bid ratio at 2.41 was slightly lower than the average for auctions of similar maturity.

Recap.

Equities: The S&P 500 rose 0.83% The Dow rose 1.2%. The Stoxx rose 0.7%.

Currencies: The Bloomberg Dollar Index was up 0.1%. The pound rose 0.4%.

Bonds: The ten-year closed around at 2.83% up 5 bp. The 2-year closed at 2.356% and the 30-year closed at 3.046%. The ten-year bund closed at 0.513% and the UK gilt closed at 1.45% and the OAT closed at 0.751%. The U.S. curve flattened to close 2/10 at 48.6 bp, 2/30 at 69.1 bp and the 10/30, closed at 20.4 bp. The U.S. 5-year closed at 2.679%.

Commodities: WTI rose 0.5% on. Gold fell 1.3%. Copper fell 1.8%. Aluminium continues to rise as concerns over the U.S. trade embargo with Russia escalates.

Bitcoin is trading around $6,886.

Aussie Market Today.

Equities should rally on the day as risk off appears to be where the market is heading. A general uptick in commodity prices overnight should also be supportive for Aussie equities and the currency.

Bonds will be weaker on the day as the risk off trade dominates. Its now a time to possibly pare back holdings and look for weakness before reinvesting.

However, this is all subject to geopolitical risks which once again are heightened. Any missiles over Syria will most likely see risk off and bonds rallying.