Today, markets reacted to Trump’s tariffs by rallying. Why? One might ask. The answer is simple. No one or at least Wall Street does not believe that tariffs will be imposed or if they are they will be a mere shadow of what’s proposed.
The negotiations for a tariff are certainly rattling the 7th meeting for NAFTA renegotiations. Whilst the meetings are cordial, not a lot is being done. Meanwhile, a number of Republican stalwarts are trying to have the tariffs watered down so as to not affect their constituents in their home states. For example, Paul Ryan is battling for Harley Davidson as the company may be affected if Trump imposes tariffs on European car manufacturers.
For many investors though, the re-emergence of volatility means greater uncertainty and also deeper analysis. Currently, shares appear to be stalling as investors question a continued surge in prices and a rising bond yield.
Companies have reported or are about to report their December results. Whilst we have seen an increase of 15% in earnings, companies are not being rewarded as much. For example, shares of firms that beat estimates are outperforming by about 0.8% whilst those that are underperforming are falling by 1.6%. The S&P 500 is currently trading at 22 times versus a ten-year average of 17 times. Investors are now starting to question prices.
Once again, the yield curve is coming under scrutiny. Most economists will tell you that a flat yield curve usually indicates a recession is on the way. But not so the Fed economists who believe that a flat yield curve is a mere representation of a benign reflection of the U.S. economy.
Historically, an inverted yield curve, in almost all instances, has been followed by an economic recession. Either way, if the yield curve continues to flatten, investors will fret about the possibility of a recession.
For investors, they will have to weigh up the risks of a ten-year bond rising through 3% and the political instability caused by Trump as the administration attempts to renegotiate a number of trade deals.
With so much happening and given trade deals take a long time to negotiate, a quick fix won’t be in the offing. The tariff deals, over time, may turn out to be noise. The real deal is what a rising ten-year bond does to the American economy.
The catch cry make America great again is somewhat strange as America is great in technology and other industries where it spends much on research. Where it spent little on R&D and capex it lost its competitive advantage.
The U.S. steel industry did exactly that and failed to upgrade. It missed the opportunities in 1957 by failing to adopt the Linz method and has failed to adopt new and better technologies along the way and all the time saying no one else could match the U.S. steel industry.
To make America great again, tariffs won’t fix the problem; technology will. However, technology does not win many votes.
For investors, the tide is turning, volatility is rising, cheap money is disappearing. What happens next will be important. With interest rates so low a large amount of gearing can be carried.
However, as the interest rates rise money spent frivolously will become a millstone. If the money went to economic endeavour then those companies should be fine. However, those that spent on increasing dividends may rue that decision.
Equities: The S&P 500 rose 01.1%. The Dow rose 1.3 %. The Stoxx 600 fell 1.0%. The Vix closed at 18.37.
Currencies: The Bloomberg Dollar Spot Index gained 0.2%. The euro rose 0.1%
Bonds: The ten-year closed around at 2.88%. The 2-year closed at 2.24% and the 30-year closed at 3.15%. The ten-year bund closed at 0.64 and the UK gilt closed at 1.50% and the OAT closed at 0.904%. The U.S. curve closed 2/10 at 63.7 bp, 2/30 at 90.8 bp and the 10/30, closed at 26.9 bp. The U.S. 5-year closed at 2.64.
Commodities: The WTI rose 2.3 %. Gold fell 0.13%
Bitcoin is trading around $11,570.
Aussie Market Today.
Today probably will be a day for equities. Following the rally overnight in the U.S. and with no deep concerns in Europe about the Italian election the equities market looks ripe for a positive day.
The AUD is likely to be a little stronger on the back of commodities improving and on the belief that Trump won’t impose tariffs as high as first suggested.
The selloff in bonds is likely to continue. For the moment, with political uncertainty and with equities rallying, bonds are likely to drift higher in yield.