Reality bites.

Returning from the 4 July break investors were cautious. There was a bit to think about. Trade news was one, well lack of in this instance. Then there was Friday’s jobs report and now there is the looming testimony by Powell to Congress. Traders are now banking on a rate cut of smaller proportions and that is affecting how the market is now behaving.

The S&P 500 continued its slide and was dragged down by tech and health-care stocks. Apple fell 2.1%, U.S. listed BASF fell 5% on a weaker forecast. Boeing was down 1.3% after Saudi Arabian budget airline flyadeal said it would not proceed with its order of 737 Max jets preferring the Airbus 320. The order was worth $5.9bio. Treasuries retreated, and gold fell. All up it was a down day.

The health -care sector was down 0.8% and the tech sector was down 0.7%. Volume on the exchanges remains light with 5.74 bio shares trading on the day versus a 20 day moving average of 6.77 bio shares.

The Stoxx 600 also fell, with Deutsche Bank leading the way. German industrial production data was released showing a slight pickup. Greek bonds rose on the expectation that the newly elected Greek government would be more market friendly.

The U.S. treasury curve is at its flattest in over a month. Presently, the bond market is in a holding pattern waiting both Powell’s testimony and the result of the FOMC meeting held later this month. This has caused the yield curve to flatten as the shorter maturities are retreating because a 50bp rate cut is no longer expected. Ten-years are holding and will be waiting for the CPI numbers due later this week. The CPI number is expected to be weak and thus pave the way for the Fed to ease 25bp later this month. Lower gasoline prices are expected to lead the CPI lower.

U.S. oil output is set to confuse market forces. A recent Goldman Sachs report suggests that growth in U.S. shale production will outpace demand through to at least 2020. This output should limit gains in oil prices as OPEC seeks to limit production.

Tin was rudely awakened from its slumber this week. The price on the LME collapsed 7% to record the lowest price since August 2016. Oversupply concerns are thought to be the cause of the collapse. Chinese exports of refined tin are up 79% and the squeeze in progress has led to a redistribution of previously hidden inventory from both Chinese producers and Western financiers.

The Rant.

Just when everyone is thinking that it is safe to forget about budgets there is a significant risk that the U.S. debt limit could be breached in early September. Despite the Trump administration saying that tax cuts would incentivise the economy.

With the standoff between Pelosi and Mnuchin, the acrimony between the Trump administration, Republicans and Democrats could be not be any starker. Large payments are due September and there is a chance of default risk ahead of the September tax infusion.

The Treasury Department could start to prioritise bond payments over government salary. Concerns about when government will run out of money can be seen in the U.S. bill market. Traders are struggling with where the point may be where the government runs out of capacity but most of the attention has been on securities maturing in October. Avoidance can be seen in bills maturing between September through to October.

Market Recap.

Equities: The S&P 500 fell 0.43% and the Dow fell 0.43%. The Vix closed at 13.96 while the Stoxx Europe 600 Index fell 0.1%.

Currencies: The euro fell 0.1% while the Bloomberg Dollar Spot Index gained 0.1% and the yen fell 0.2%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.048%. The 2-year is trading at 1.888% and the 30-year is at 2.532%. The U.S. curve closed on the day with the following closes 2/10 at 15.6 bp, 2/30 at 63.7 bp and the 10/30 closed at 48 bp. The U.S. 5-year closed at 1.854%. The 2/5 spread is now -3.6 bp. The ten-year bund closed at -0.369% and the British gilt closed at 0.713%. The 10-year yen gilt is trading -0.146%.

Commodities: WTI was flat while gold fell 0.4%.

Bitcoin is trading around $12,238.

Aussie Market Today.

Equities will continue to be weak. With little news to go on, the equity market remains vulnerable to headline fever.

Bonds will be bound by offshore movements. Expect the market to be reactive. Meanwhile, the Aussie Itraxx is just a little wider and unsettled. Demand for corporates remains as demand for shorter maturities persists.

Geopolitical risks remain high and still need to be monitored.