Not so long ago 23,000 on the Dow looked like a long leap of faith. Well, today that faith was repaid and the equity market pushed through the 23,000 level to close a fraction below 23,000. Wednesday no doubt will see the Dow push on. For investors looking to buy dips, this strategy seems to be failing. (Incidentally, the title ‘buying on dips’ is one of Google’s most asked search item.) If one defines a dip as a 3% fall, then one has to go all the way back to November to find a dip. For those concerned about P/E’s, then the bus has well and truly left the bus stop.
Today was yet another day of good banking results and no doubt the tone is being set by financials. Morgan Stanley reported today and the trend of falling trading revenues but increases in the Wealth Management division or some other division continued. For Morgan Stanley, the Private Wealth area has been a large driver and so too equity trading. Bond trading revenues fell by over 20%. The ROE was a healthy 9.6% compared to a target of 9%, hence the result was very good. Goldman’s also reported they suffered a similar decline in trading revenues and their trading arm is on pace to record the worst year since 2008.
Amongst all the hubbub, bonds did relatively little. The 2-years weakened a couple of points, the 10-years flexed and the 30-years rallied. Much of the weakness in the front end of the bond market could be due to Trump’s announcement today of his shortlist of candidates for the Fed Chairman which he will announce November 3. Stanford University economist John Taylor has firmed as the favourite, with Yellen as the number 2. Warsh’s star appears to have dimmed. Taylor is of concern to some members of the Fed with his prescriptive views because he believes that an economy can be described by an equation and that certain events require a model. Rosengren has expressed concerns.
However, the real issue is not so much Taylor’s models but rather what he does with rates if appointed. Taylor is hawkish and under Taylor as Chairman there is a strong chance that rates will be hiked and continue to be hiked for a while. His view is that monetary policy is far too loose. Unremarkably, as Taylor’s odds have firmed so too the probability of a rate hike. The probability of a hike now stands at 80.3% in December and 93.2% in June 2018. That’s a far cry from a month or so ago when the probability of a hike was priced out. The yield curve flattened and that was mostly the 2-year’s rising and the 10’s rallying a point. With so much liquidity in the market place longer bonds appear to still have friends.
Whilst NAFTA is gaining a lot of attention and its mostly bad, India is looming as a major market for U.S. crude. India purchased its first ever shipment recently and looks set to purchase more. Aramco is said to have asked investor relations company FTI Consulting to suspend its investor relations advisory work relating to the Aramco IPO. This comes just hours after the Saud Oil Minister said that the IPO was on track for a listing.
Equities: the S&P 500 rose 0.1%, the Dow rose 0.2% while the Stoxx 600 fell 0.3%.
Currencies: U.S. Dollar Spot Index gained 0.2%, the euro fell 0.3% and the pound fell 0.5%
Bonds: saw 2-years weaken 3bp to close at 2.55% while the U.S. 10-year closed unchanged 2.30%. The 30-year closed at 2.805% in 1 bp on the day and the yield curve flattened about 3bp.
The U.S. bond curve flattened with the 2/10 closing at 75 bp, the 2/30 at 125.3 bp, and the 10/30 closed slightly wider at 50.2bp as the curve flattened between 2-years and the longer dated maturities.
Commodities: Gold fell 0.8% and WTI rose 0.2%. Copper fell 1.2%. Palladium rallied as demand for new cars in the U.S. as a result of damage caused by Hurricane Harvey. Palladium is a key component in catalytic converters. Palladium now trades above platinum, the first time since 2001. The Chinese government’s smog reduction policy will mean that about one tenth of its aluminium smelting capacity will be reduced from the market by year end. This means that aluminium is likely to increase as smelters increase capacity before the cuts are required.
Aussie Market Today.
Aussie bonds will continue to trade in a tight range. Equities look likely to continue the upward trend and credit looks well bid. Investors will remain long as with no bad news on the horizon and with low interest rates valuations look reasonable.