WHAT TRADE WAR?

What trade war? That’s pretty much what the equity market said today. After soothing statements from Kudlow and Mnuchin, the equity market picked up its ball and started playing again. But has the equity market forgotten something?

The equity market as always prices itself on expectations. And the expectation is,  the market will see revenue growth of 20% vs a current revenue growth of 17%. What the equity market appears to have forgotten is that the CBO (Congressional Budget Office) may well have raised its forecast for economic growth to 3.3% for 2018 but then growth slows. The tax cuts are likely to produce growth in 2018 but the impact wanes quickly.

With that slowing growth comes an increasing budget deficit with the expectation that the deficit will surpass $1 tr in 2020, two years ahead of schedule. The CBO also suggests that interest rates will only rise modestly with Fed Funds at 3.4% in December 2019. Something does not quite make sense here.

The blowout is roughly $350 bio. If the CBO is correct in its deficit forecast, then corporate America is going to have a tough time as borrowing rates will increase significantly and the dividend has been frivolously spent.

Meanwhile, we have forgotten the little trade spat between China and the U.S. This to some degree is not a huge issue. However, should the trade spat spread to NAFTA as Trump keeps suggesting, then the U.S. will have a problem. All the while the equity market appears to be shrugging off the issue and looking to put risk on.

Should the spat between the U.S. and China continue, then there is more at stake than trade. China is a major creditor to the U.S. and could easily turn the tide by turning the screws on capital. President Xi Jinping will deliver a speech Tuesday and part of that speech is expected to be dedicated to how China is reviewing the use of its currency as a weapon.

Should China step away from the U.S. bond market and set its currency at a lower rate then the U.S. would have a lot to consider. What the markets want is sanity and stability, not helter skelter reactions by both sides of the trade spat.

On the day, equity markets had a solid run higher before plummeting to the close. Some of the rally could be Asian buying before the U.S. open and the calming comments from Kudlow and Mnuchin. The equity market, however, remains nervous and the Vix remains high.

In the Eurozone, bonds remained near recent lows as concerns over growth continue. Bonds are expected to remain low as hefty redemptions over the week will mean money needs to be reinvested. There is some 60 bio euro of maturities this week and only 13 bio euro of issuance.

Of concern is the fact that German exports appear to be slowing. Exports for February plunged and posted the largest monthly drop in more than two years. (Exports fell 3.2%.) The buoyant outlook for Europe now appears to have waxed and is now waning. This should have alarm bells ringing especially as Trump continues to target trade with Europe.

 

Recap. 

Equities: The S&P 500 rose 0.41% The Dow rose 0.28%%. The Stoxx rose 0.1%.

Currencies: The Bloomberg Dollar Index was down 0.2%. The pound rose 0.3%.

Bonds: The ten-year closed around at 2.78%. The 2-year closed at 2.28% and the 30-year closed at 3.01%. The ten-year bund closed at 0.506 and the UK gilt closed at 1.406% and the OAT closed at 0.74%. The U.S. curve flattened to close 2/10 at 49.7 bp, 2/30 at 73 bp and the 10/30, closed at 23.1 bp. The U.S. 5-year closed at 2.60%.

Commodities: WTI rose 2.1% on. LME aluminium rose 6.6% Gold rose 0.3%.

Bitcoin is trading around $6,677.

Aussie Market Today.

Today, depending on how the world views President Xi’s speech, could either end up being risk on or risk off. It is expected that there may be squaring of positions ahead of the market. This could either be a major event or a just a puff of wind. A lot depends upon Xi’s tone and what is said.

Equities should rally as the trend overnight was slightly positive. Bonds should be relatively stable with a little selling as dealers pare positions.