It’s hard to know what is happening in the Trump Administration.  However, one errant tweet on late Thursday sent the markets off in various tangents.

The equity market fretted about growth and profits following the disaster of a jobs report. Whilst there may be some weather related effects in the jobs report, the U.S. payrolls rose 103,000 versus an expected 178,000. That’s quite a difference.  Construction fell 15k, and retail lost 4k. The biggest gain in payrolls was in the finance sector which was up. Payrolls were only up marginally, growing at 0.3% after rising 0.1% in February.

The full extent of the impact of the tweet was felt squarely by the equity market. Both equity indices fell some 2% and the Dow is now down about 0.75% for the week. The tweet suggested that a further $100 bio of tariffs would be added to the tariff already to be imposed on the Chinese.

Over the weekend, it appeared as though the Trump Administration was backing away from Trump’s earlier tweets suggesting that a trade war was not on the cards.

The only problem now is that brinkmanship is to the fore again after Trump tweeted the Chinese would be the first to concede. That appears to be highly unlikely and one only has to look at the South Koreans.  When the Koreans allowed a missile system to be erected on Korean soil, the response was quick from Beijing and Hyundai Motors, the number 2 car seller in China, saw sales plummet.

Trump is the catalyst and the problem is that world growth is slowing and a trade war between China and the U.S. could be detrimental to growth on a global basis. Global growth in 2017 was up 3.7%, up 0.5% from the previous year. However, in 2018, we have seen retail sales fall in the U.S. in three consecutive months.

Construction is slowing and so too jobs creation. The differential between short and long bonds in the U.S. has flattened and copper has fallen 6.9% this year.

Copper is often seen as an indicator for growth. Caterpillar and Boeing have fallen further than the market in recent times. Germany saw a 1.6% tumble in industrial output. Meanwhile, manufacturing activity in March was down in 21 of 30 countries with much of the decline stemming from both Europe and Asia.

The Citigroup global surprise index is now below zero on Friday. The index measures the aggregate of economic forecasts being met or passed. JPM cut their global growth forecast by 0.1% to 3.3%.

The point being that growth at present is a little unsteady.  Any trade spat between the U.S. and China that could escalate into a trade war would be detrimental to growth.  And that’s not good for equities. In a trade war, you won’t have the idle boast of how’s your 401k going.

All this, though, is terrific for bonds. The environment is in risk off mode and until we see any significant increases in defaults it will remain that way for a while. The caveat being that as the U.S. slips below 3% growth and the deficit widens and as issuance increases, capital will need to be attracted. That capital will come at a cost either by way of increased interest rates or a weak currency or a combination of both with probably some inflation.

For U.S. business this could be a disaster as many have spent their tax dividend and low interest rate environment in non-productive activities such as share buy backs and increases in dividends. Increases in borrowing costs would make businesses vulnerable. But that’s the future.

The U.S. most certainly does not need a trade war. China has exported significant deflation to the U.S.  in many products and helped global growth. A spike in inflation caused by a trade war would be a nasty event and could see rates rise significantly.

Currently, it’s risk off the U.S. bond curve continues to flatten as long bonds rally. Meanwhile, the Vix continues to rise, suggesting further weakness for equity markets.


Equities: The S&P 500 fell 2.19%. The Dow fell 2.34%. The Vix closed at 18.94 a very strong bullish signal given where the Vix has been of late. The Stoxx fell 0.4%.

Currencies: The Bloomberg Dollar Index was down 0.2%. The pound rose 0.7%.

Bonds: The ten-year closed around at 2.775%. The 2-year closed at 2.27% and the 30-year closed at 3.019%. The ten-year bund closed at 0.496 and the UK gilt closed at 1.394% and the OAT closed at 0.734%. The U.S. curve closed 2/10 at 50.3 bp, 2/30 at 74.8 bp and the 10/30, closed at 24.3 bp. The U.S. 5-year closed at 2.587%.

Commodities: WTI fell 2.5% on. Copper rallied 1.8%. Gold rose 0.6%.

Bitcoin is trading around $6,982.

Aussie Market Today.

Today could be seen as a risk off day. However, that could all change on a tweet. It appears as though whilst Trump’s people are trying to hose down the chance of a trade war, Trump is escalating the rhetoric via his twitter feeds. That is causing a lot of unnecessary volatility.

On the day expect equity to weaken as the outlook for global growth is receding. That will impact equity over time. Bonds for the moment are the safe haven and we should expect to see bonds continue their rally on the day.

There may be some squaring of positions as traders who were long equity may choose to reduce their positions whilst for the bond traders they may choose to sell to take some profit. The trend currently is be long bonds and shorten equities however that can change in a tweet.