Equity markets are in retreat for the moment. Monday saw yet another almost 2% down for the Dow and from the highs in January the Dow is almost down 11%. So, what’s changed? Equity investors have been taking risk off the table since the beginning of the year, partly in response to sluggish growth in the U.S., partly because better opportunities beckoned in Europe and Japan and partly because of political uncertainty.

The friction the Trump Administration is generating with its allies is somewhat palpable and that’s being played out now in the U.S. economy. Investors are retreating. And this is all coming at a time when liquidity is tightening, with no more free money being generously handed out by central banks.

Equity markets are in risk off mode because of the looming trade war. Uncertainty exists as to just what will or won’t be affected both in sides of the Pacific as well as the Atlantic. One thing  is certain –  as anxiety rises investors will look to reduce debt. Doing so means selling equity and buying bonds.

Another reason for the weakness is the fact that corporates have recently released their company reports. There is a five-week window after reporting in which companies cannot do buybacks. So many corporates that wish to buy back their shares, cannot do so.  Meanwhile, the market has lost a buyer when it desperately needs some buyers to stabilise the equity market.

Investors are in a curious spot as many of the carry trades no longer work. The hiking of rates is causing a loss every time investors look to roll. That is taking heat out of the market. The trade war is expected to impact the economy and that’s what is causing some distress in the equity market. Tech stocks continued their decline and this decline was exacerbated by Trump’s attack on Amazon.

For bonds, the recent rallies are a dangerous time for bond investors. The risk off trade is causing bonds to rally.  However, bonds may not quite be the safe haven people are hoping for them to be. For starters, any slowing of the economy will lead to the deficit ballooning and that is where it all gets interesting as some market pundits are now suggesting a little bit of inflation could help.

To quote Bloomberg: (from Bloomberg Opinion “Inflation Could Help Ease the U.S.’s Debt Burden” by Aaron Brown April 3, 2018. See link to the full article at the end of the blog.)

“Look at the experience from high inflation in the 1970s and early 1980s. Since 1970, the U.S. has issued $134 trillion of Treasuries to the public  and repaid $119 trillion, leaving $15 trillion outstanding. Converting to 2017 dollars, the U.S. issued $184 trillion, repaid $163 trillion and so has net borrowings of $21 trillion 2017 dollars. Since it only owes $15 trillion of 2017 dollars, it saved $6 trillion due to inflation.  On the interest side, the U.S. paid $7 trillion in interest, which translates to $12 trillion in 2017 dollars. Inflation accounted for $7 trillion and $5 trillion was real return to investors. So while inflation since 1970 saved the U.S. $6 trillion on debt repayments, it cost it $7 trillion in additional interest.”

As deficits increase investors fret and interest rates rise. For businesses this means that borrowing costs rise thus slowing economic activity. We may well have seen the top for a while. Rates inevitably have to rise, and the currency weaken as investors demand a higher premia to purchase the bonds. This all takes time and we are only at the beginning.

U.S. treasuries are rallying as equity investors become nervous about economic conditions. The ISM report today paved the way for the risk off trade to continue and the report highlighted the weakness within the U.S. economy. The ISM for March fell from 60.8 in February to 59.3. The, imposition of tariffs were blamed for the weakness.


Equities: The S&P 500 fell 2.2%. The Dow fell 1.9%. The Vix closed at 23.62.

Currencies: The pound gained 0.2%

Bonds: The ten-year closed around at 2.73%. The 2-year closed at 2.25% and the 30-year closed at 2.967%. The ten-year bund closed at 0.494 and the UK gilt closed at 1.348% and the OAT closed at 0.718%. The U.S. curve closed 2/10 at 48 bp, 2/30 at 71.2 bp and the 10/30, closed at 23 bp. The U.S. 5-year closed at 2.55.

Commodities: WTI fell 2.8% on concerns of world growth. Gold rose 1.3%.

Bitcoin is trading around $6,990.

Aussie Market Today.

The market will be simple. Sell equities as we are in risk off mode. Buy bonds. And buy more bonds. Until we get a better read on the tariffs imposed by both the U.S. and China, markets will be on edge. At stake is global growth and many countries will be impacted by a trade war.