The risk on trade faltered badly today. The worst fall in seven weeks with the dollar and equities falling. The market talk was that of mixed earnings being the cause and maybe it was. After all Chipotle, once the darling of the fast food industry, fell 14.7% on the day. But no, it was not mixed earnings. It was much simpler, and the reason was political. The fallout from Flake’s speech and Bob Corker’s criticism of Trump cuts far deeper, and the markets are only just starting to wake up.
Trump is running Government in the same way that he ran the Apprentice. It’s a reality TV show and what is good for ratings is divisiveness, and no one knows this better than Trump. Forget the political analysts, they simply don’t get it or want to get it. Examine the way that Trump is looking to select his Fed Chair. It’s a popularity contest in part, it’s game show in part, but it is disruption.
Trump was elected as a disrupter and this is what makes him so appealing and why he should command respect even if one does not agree. He has taken the Presidency off chart and made a mockery of many Government functions. Such examples are the hiring of the CEO of the EPA to put it out of business or at the least totally defang its ability to operate.
Or more recently, his selection of Scott Garrett to run Exim Bank. Scott has in the past vowed to shut the bank down. The Export Import Bank is seen by many exporting manufacturers as important and necessary. Scott was labelled as untrustworthy by the by National Association of Manufacturers and as a selection they are very unhappy. Thus, Scott’s selection is seen as a catastrophe.
Given Trump keeps talking about trade and America first, this appointment would appear to be promoting the idea that America under Trump is not so interested in Trade. Once again this is a disruption and exactly what Trump wants.
The problem is there for all to see and that’s why in my opinion risk on today became risk off. The likelihood of the tax cuts is looking increasingly difficult. With Corker, Flake, McCain and Sasse all at war with Trump, the necessary votes for legislation to pass is becoming more difficult. Add to that the likes of Bannon have told McConnell that his time has past.
You then begin to understand that as these Senators and Congressmen come under pressure they are turning on Trump. Disruption is Trump’s platform. However, too much disruption means things don’t get done. That’s why the equity market and the dollar had a bad day today. And these divisions will only become wider and deeper.
The loonie fell today after the Bank of Canada raised concerns over NAFTA and the impact that the tearing up of the agreement would have on the Canadian economy.
U.S. treasuries were weaker on the day with the U.S. 10-year hitting a seven-month high to trade at 2.475%. The equity market pared losses after Trump suggested on Fox that he was still considering Yellen, (but this could all still be part of the game) as many GOP members want Yellen replaced with their straw poll winner John Taylor.
The falls all on a day when U.S. durable goods orders and new homes sales data were strong. New orders were up 1.3% and family home sales were up 19%.
Equities: the S&P 500 fell 0.47%, the Dow fell 0.48%. The Stoxx 600 fell 0.57%.
Currencies: The euro gained 0.3% and the pound rose 0.9%
Bonds: saw a sell off across the curve. The 5-year treasury auction was weak while 2-years weakened 2bp to close at 1.603%. The U.S. 10-year closed 2.437% out about 3bp while the 30-year closed at 2.949 % weaker by about 1 bp on the day.
The yield curve maintained its shape. The 10-year benchmark closes were, gilts closed at 1.40%, bunds at 0.725% and OAT’s 0.725%. Draghi talks Thursday and is expected to discuss QE and the possibility of paring back purchases by the ECB.
Commodities: Gold rose 0.1% and WTI fell 0.5%. Nickel is expected to become the hot new item for China’s commodity traders as the new darling of the electric vehicle battery spotlight. China’s imports have recently increased significantly.
Rhodium prices have surged of late with rhodium up some 40% so far this month. Industrial demand is driving prices and mine shortages are driving prices higher. The U.S. steel manufacturers are losing out to Russian steel manufacturers.
Aussie Market Today.
Aussie bonds will continue to trade in a tight range. Bonds will probably trade slightly worse on the day. Equities may sell on the day with some profit taking. The overall trend on the day is likely to be risk off. However, expect some confusion.
The U.S. 10-year versus Aussie 10-year is about 34 bp and that’s the tightest for some time. Under the current market conditions, this looks too tight and either the currency has to give, or the bonds sell. The currency has fallen about 2 c, over the week. However, bonds could easily sell off some 5bp or so under the current market conditions.