The markets once again surged, fell, then surged again as we headed to the close. The reason for the surge was simple. It appears as though an agreement has been reached to raise the debt ceiling by $300 bio and the ceiling now runs out in two-year’s time. The negotiations are set to be finalised post the midterms in November. Of interest, it appears as though the hawks won an $80 bio increase followed by an $85 bio for the military. The Democrats won a $63 bio increase followed by a similar amount in 2019 for non-military spending. Both parties breathed a sigh of relief and headed to the bar. The debt ceiling would be increased to March 2019.
Meanwhile, equity thought about the debt ceiling being breached and forgot what the bond market was most likely going to do. And the bond market sold. Bond investors sold because the debt ceiling raises the amount of money the Treasury has to raise to keep Government open. Debt is already ballooning under the current administration. At some point, bond investors will have a really good go at selling. But for the moment, bond traders are being relatively benign.
The ten-year rose back to levels seen Monday with the 10-year trading at 2.885% before retracing to 2.85%. The 10-year bond auction today was not well bid and that may also have affected the day’s trading activity. There is an expectation that with increased bond issuance and now with further issuance due to an increase in the debt ceiling that bonds will move higher. The increase in yields could be quite significant especially with the Fed no longer being a major buyer of bonds later in the year as QE wind up ramps up.
For equity investors, they will have to divine what is happening in the future. Increased bond rates mean increased borrowing rates for companies and increased mortgage rates for householders. The U.S. economy could genuinely slow despite the tax cuts and especially if those tax cuts as it appears will be paid out as dividends and share buybacks, not wage increases over the medium term for all employees.
No doubt with this in mind but bonds in focus the Chicago Fed President Charles Evans suggested that the Fed could hold off until at least mid-2018 before a rate increase. Charles is concerned that the economy may not be as robust as expected and inflation could remain benign. Evans is of the opinion that inflation could hit the Fed target of 2% in 2019 or 2020.
Meanwhile, it appears as though the blame for Mondays selloff is being roundly set against the Vix and the various ETN’s and ETF’s issued to trade the Vix. Machine selling appears to be a significant part of the equation but also just the sheer quantity of contracts required towards the end of Monday to square positions.
On the political front Trump, lost a key aide today Rob Porter. And President Trump vented at traders for selling securities on Monday.
Equities: The S&P 500 rose 0.4%. The Dow was down 0.08%. The Stoxx 600 rose 2%.
Currencies: The pound fell 0.5%, the euro fell 1%. The Bloomberg Dollar Spot Index was up 0.5%.
Bonds: The ten-year hit 2.86% the highest close in 4-years. The 2-year closed at 2.14%. The ten-year bund closed at 0.687% and the UK gilt closed at 1.55% and the OAT closed at 0.968%. The U.S. curve closed 2/10 at 71.5bp, 2/30 at 98.9 bp and the 10/30, closed at 27.3bp. The U.S. 5-year closed at 2.57.
Commodities: Gold fell 7% and WTI fell 2.4 % over concerns on U.S. oil output. Copper fell 2.8%.
Bitcoin is trading around $8,250.
Aussie Market Today.
Bonds are likely to be weaker on the day and equity should be a little mixed following the overnight moves. Bonds are vulnerable to a savage selloff that could come at some point but probably not today.
The currency is at risk as both U.S. 10-year bonds and Aussie 10-year bonds are flat. Expect some movement over time in either the currency or bonds and most likely both.