Today saw the equity market rally on the back of expected earnings being up between 17-20% yoy. A great result in most circumstances. However, it appears as though some investors may be looking for gains.

With geopolitics out of the way and with no major retaliations by the Russian post the demonstration of strength shown towards Syria, equity markets had little to fear. Bonds though were surprisingly steady, almost too steady. What happened to the switch out of risk off assets into risk on assets? There was little evidence to show prior to the close.

Post the close, Trump  made various comments relating to China and how the U.S. can penalise China over the sharing of technology if a U.S. company wishes to operate in China.  This may come to something or may not.  Either way, it will be a piece of news that the Asian region will deal with before handing the books over to Europe later today.

Retail sales for March were released today and showed a gain of 0.6%. The first rise in three months. The rise was somewhat discounted as cold weather affected sales.

The outgoing New York Fed President John Dudley reiterated that the Fed is likely to raise rates three or four times this year. Dudley is expecting inflation to rise. Dudley concluded that should inflation rise above 2% by an appreciable margin, then the Fed would be aggressively tightening. This is a point worth considering should Trump’s muse today of a trade war being just around the corner eventuate.

Dudley’s view is consistent with the European view towards bonds. Bond yields have been steadily climbing albeit slowly.  The overall tone is bearish.  However, should we see further escalation of hostilities by the west towards Syria that view may change. The greatest concern presently appears to be concern over Trump’s and China’s opposite views of global trade and tit-for-tat tariffs.

It is interesting to note that there is a stoush going on in the treasury market over failed trades. There is some discussion that a failed trade would incur a 1% minimum “fails charge” for not delivering treasuries agencies and MBS in pledged trades. Failed trades are averaging $145 bio a week, which is more than twice the level of 2014.  However, the fails are a mere fraction of the failed trades in 2008 which amounted to $2.7 tr.

The bond market is currently highlighting some structural flaws within the U.S. economy and the heavy dependence of Treasury to see economic growth of greater than 3% to fund Government. The great challenge is where to borrow at the most effective rate for the tenor. The shape of the yield curve implies that the longer tenors should be more attractive.

However, it is worth considering why the Treasury is tendering so many T bills when given the level of interest rates, longer issuance should be the norm. The Treasury will issue some $600 bio of T bills this year. Federal debt will rise to about $21 tr and $5.6 tr is held by various government agencies. This begs the question why the Treasury is issuing so many bills with rates at such a low level and with rates expected to rise over the next couple of years.

The answer could be that 2.95% for a 10-year bond stretches the ability to pay. The conspiracy theorist could further surmise that the Treasury believes the U.S. cannot pay its interest bills if rates move too much higher and that a recession is looming. The Citi Surprise Index has coincided with a peak in 10-year yields however no one is looking for bonds to rally to any degree.

The problem for bond markets globally could be that with QE being wound back for a number of countries the great money supply becomes a thing of the past. Investors will no longer need to compete with central banks for bonds and other investments and real market economics begins to be applied.

For equity markets, this could be a bruising.  And the Fed should be avoiding any noise from that direction. The U.S. President may however be reluctant to allow a negative movement in the equity markets given he has placed much of political capital on an improving equity market.

As the calendar year 2018 progresses, we could be in for a lot more volatility as investors weigh up economic progress, tightening of free money and rising interest rates.

Geopolitical risk and political risk appears to be increasing. The Comey / Trump attacks and the revelation that long time supporter Sean Hannity is using Trump’s lawyer Cohen has come as a surprise in Mueller’s Russian investigations.

Even more curious, Hannity wanted his name suppressed.  The temperature is rising.  Trump also has been commenting on China and Russia, calling them currency manipulators which directly contradicts Mnuchin and Treasury’s view. Trump appears to be stirring the pot again.


Equities: The S&P 500 rose 0.8% The Dow gained 0.87%. The Stoxx fell 0.4%.

Currencies: The Bloomberg Dollar Index was down 0.3%. The euro gained 0.4% and the pound rose 0.7%

Bonds: The ten-year closed around at 2.829%. The 2-year closed at 2.38% and the 30-year closed at 3.025%. The ten-year bund closed at 0.525% and the UK gilt closed at 1.463% and the OAT closed at 0.747%. The U.S. curve flattened to close 2/10 at 44.6 bp, 2/30 at 64.4bp and the 10/30, closed at 19.6 bp. The U.S. 5-year closed at 2.68%.

Commodities: WTI fell 1.5%. Gold was steady. Aluminium continued its steady rise and rose 4.99%.

Bitcoin is trading around $8,282.

Aussie Market Today.

A lot will depend today on how the Asian zone reacts to Trump’s comments towards China and Russia as currency manipulators and that a trade war may be just around the corner.

The day will probably see some early buying of equities because that’s how the U.S. finished. However, as Asia starts to trade that view may change.

I expect to see a little volatility with bonds probably trading a little better as investors become a little cautious and await further comments from the U.S. President.

The day probably will end up directionless. However, the caveat is if we get further comments that suggest the U.S. is looking to take action against China.