WHERE NEXT? WHAT NEXT?

Markets at present are taking a deep breath following last week’s market movements. With the Vix trending back to levels normally associated with bear markets, closing around 25.  Important today for equity markets was that the equity market rallied.

The nexus between easy cash and asset appreciation is not quite broken yet. However, as more focus is directed towards Trump’s budget that may well change. Trump is favouring increases in military spending that are significant (up $716 bio) and the building of his wall has now moved to about $23 bio and $200 bio in infrastructure. However, services such as Medicare for the aged and people with disabilities are to be cut and so too a number of other services such as contributions to the UN.

Treasuries on the day are generally higher in yields across the curve. The 2-year is steady around 2.077. It is interesting that Ray Dalio has suggested that the U.S. economy has peaked and likely to slow. This synopsis would not be good for treasuries nor equities should his analysis prove correct. With increased issuance, a deficit blowout, and rising short term rates, the economy would be stressed.

U.S. bond yields are also likely to be pushed higher as yields in the UK and Europe edge higher. The UK is likely to raise rates in March. The target is expected to be around 2% over the next two years. However, many economists believe the UK won’t be able to raise rates to that level.  As European growth stirs, bond yields there are also rising. There is now a constant discussion around whether the ECB should be purchasing assets beyond September.

A lot of eyes are now focussed on the U.S. inflation number due Wednesday. A breakout in inflation will see central banks shift from trying to stimulate growth to dampen inflation and that means rate hikes. Rate hikes per se don’t mean weak equity markets. However, it should cause a pause in asset appreciation for a while.

Commodities on the day provided much of the catalyst for today’s buying of equity. WTI rallied and so too many of the base metals.

Recap. 

Equities: The S&P 500 rose 1.39%. The Dow rose 1.7% after being at one stage up 2.5%. The Stoxx 600 rose 1.2%.

Currencies: The Bloomberg Dollar Spot Index fell 0.2%.

Bonds: The ten-year hit 2.86% while the 2-year closed at 2.077%.  The ten-year bund closed at 0.70% and the UK gilt closed at 1.605% while the OAT closed at 0.998%. The U.S. curve closed 2/10 at 78.1bp, 2/30 at 106.3 bp and the 10/30, closed at 28 bp. The U.S. 5-year closed at 2.56.

Commodities: Gold rose 0.5% and WTI rose 0.2 % while copper climbed 1.8%.

Bitcoin is trading around $8,880 and steady.

Aussie Market Today.

Equities should continue to rally today. Commodity prices are somewhat better and this should help the mood of the equity market.

Selling of bonds should continue on the day. Bonds should drift weaker over the course of the day.

The AUD is currently showing some strength against a weaker U.S. dollar. This strength is probably due to commodity prices. Watch the AUD later in the week as the inflation numbers in the U.S. are released. We could be in for a bit of a roller coaster.