IN SYNCH – U.S. MNCs & Global Growth

Synchronous growth, not the lure of pending tax cuts or the possibility of a tax cut is what is driving U.S. equity markets ever onwards and upwards. It would appear that for many U.S. multinationals in the Dow have benefitted significantly over the year as global growth picks up. And they are likely to do more so as the global economy gets into full swing.

Which makes one wonder why these companies are happy to side with Trump’s anti trade policies. Or perhaps that Trump ever the bully will bully more countries into buying U.S. goods. Either way, October was a great month for equities and since the end of April the Dow has rallied some 8%. So, the old adage of sell in May and go away would have been a disaster if one initiated that trading strategy.

Bonds are also in a synchronous motion. Easy central bank money has the system awash with cash and any blip upwards in yield is often short lived and seen as a buying opportunity. We saw that on Friday and we are seeing it again. Bonds on the day rallied and the yield curve has the smell of a bull curve. In addition, two-year bonds weakened a couple of basis points whilst the 30-year rallied on demand some 2 basis points.

Overall the yield curve flattened about 2-3 bp depending on the point on the curve. On Wednesday, the Fed will conclude its two-day meeting, the Treasury Department will release its refunding plans and the Republican lawmakers will introduce a bill to cut taxes. Interest rates are expected to remain on hold.  But the probability of a rate hike in December has ballooned out to 85.7% and with a further rate hike in June 2018 at 94.9%. There is also a bit of data to be released over the next few days. Manufacturing data is released Wednesday, and non-farm payrolls report for October will be released Friday.

U.S. fund managers are recommending that bond holdings in model global portfolios be increased as they fear the current economic expansion is coming to a close. Of the 13 U.S. based managers in the survey, bond allocations were now at 35.1% versus 34.8% the previous month. Stock allocations are steady at 56.7%.

For the moment political intrigue seems largely forgotten. Trump in his usual manner is happy to cast aside political apparatchiks and disparage any who disappoint. That would certainly appear to be the case for Papadopoulos, a once regarded expert in international affairs by Trump. I guess it pays to deride and to discredit should some damning evidence arise from the prosecution by Mueller.

Europe appears to have settled as Spanish equities stage a recovery of sorts after Madrid won the power struggle against the Catalan separatists.


Equities: the S&P 500 rose 0.1%, the Dow gained 0.12% while the Stoxx 600 rose 0.3% and rose 1.8% for the month. The Ibex gained 0.7%.

Currencies: The euro fell 0.1 %.

Bonds: the 2-year weakened 2bp to close at 1.60% while the U.S. 10-year closed 2.378 % out about 1bp. The 30-year closed at 2.875 % in about 1 bp on the day. The European 10-year benchmark closes were, gilts closed at 1.33%, bunds at 0.36% and OAT’s 0.594 %.

The US bond curve closes were as follows 2/10 at 77.6 bp, 2/30 at 127.3bp and 10/30 at 49.6.

Commodities: Gold fell 0.5% and WTI rose 0.4%.  China lashed out again at the U.S. aluminium foil dumping ruling again. Coke, coking coal hit 4mth lows as the winter sell off continues. Demand is expected to fall as China imposes its pollution control measures. In addition, copper slipped 0.4% on concerns the October rally was overstretched.

Copper rose 5% this month while nickel closed up 5.3% the highest level since June 2015. Codelco has raised its copper premium to European buyers to $88 a tonne up from $80-85 a tonne. Zinc ended up 1.7% and lead closed 0.2% higher.

Aussie Market Today.

The trend is your friend as they say and there is no reason for bonds to sell off just for the moment.  I expect bonds to continue with the positive tone. Equities look set for another positive day although any rally will be somewhat muted.

Credit for the moment appears well bid and demand continues.