The issue that all investors and traders have at present is what to do. Something has to be done but what? It’s a quandary because there are signals that suggest the U.S. economy has stalled when it should be rallying and there are signals such as the Trump tariffs that urge caution. Investors and traders need to be seen to be making money and the current environment is not helpful.
The Fed has now signalled a very dovish posture. The way the market wants to now trade is to look to trade steepeners, buy TIPS, currency equities and commodities. And if the economy falters abandon those trades, look for flatteners and sell. And that is where we are now, stuck in a conundrum of what to do. The economy is ok but faltering and the alternatives are not much better. It’s a tough choice.
The overseas accounts are buying the belly of the curve with Asian and Japanese accounts favouring the 5s and 7-year bonds. The traders are in broking mode and selling at opportunity.
And for stocks the picture is muddied. After just avoiding a full-blown bear market, stocks have rallied. But the rally is somewhat muted. Real money has not been causing the rally and money has been pulled from equity funds. However, this is somewhat good news because a rally can be sustained given there are plenty of investors on the sidelines looking for opportunities.
Stocks have recovered from the collapse in the fourth quarter 2018 and risen the past two months. For comfort we can look to the NYSE cumulative advance-decline line and that’s now above the September 20, 2018 point. Momentum is picking up and that means the momentum traders will start to roll into stocks and push prices higher. Risk is climbing and the party can come to an end should growth slow markedly or tariffs are imposed or some other event that changes opinion. It may look rosy, but the picture can quickly sour.
The most important event today was the release of the Fed Minutes. What we learnt today was:
- Agreement to shrink the balance sheet by the end of the year. (Maturities can do some of the work.)
- The Fed was no longer committed to 2 rate hikes in 2019.
- The Committee is taking a cautious and patient approach to 2019 as downside risks appear to be increasing; notably, slower global growth, financial market turmoil, budget deficit blowouts.
- The Fed is becoming dovish in its view.
- A tightening is possible.
Investors will be watching the headlines and technicals as the rally post-Christmas has added 18%. And one wonders what catalyst can propel stocks higher. News and the reaction to the news will become critical over the next few weeks.
Elsewhere, we have UK Parliament doing its best to be a Greek Tragedy, the Italians have issues with their funding and palladium has soared to record levels.
On the day, bonds have been relatively steady weakening 1 bp in the longs and equities staged a limp rally. Caterpillar rose on the back of Chinese demand for its machinery.
Equities: The S&P 500 rose 0.1% and the Dow rose 0.18%. The Vix closed at 14.22 while the Stoxx gained 0.7%.
Currencies: The Bloomberg Dollar index was flat while the euro rose 0.1% .
Bonds: (as at 4.30pm). The ten-year is trading at 2.648% while the 2-year is trading at 2.502% and the 30-year is at 2.997%. The ten-year bund closed at 0.101% and the British gilt closed at 1.181%. The 10-year yen gilt is trading -0.036%. The U.S. curve closed on the day with the following closes 2/10 at 14.4bp, 2/30 at 49.5bp and the 10/30 closed at 34.9bp. The U.S. 5-year closed at 2.471%. The 2/5 spread is now -3.3bp.
The probability of a rate cut in the U.S. is now at 36.7% in January 2020. No hike.
Commodities: WTI rose 1.5% while Gold fell 0.1% and Palladium hit a high of $1,482 (LME).
Bitcoin is trading around $3,939.11.
Aussie Market Today.
The Aussie market looks set to continue its rally. The outlook for equity is benign but as we know that can change quickly. Trump is rattling the pen again, this time threatening Europe with tariffs if the Europeans don’t reach a trade agreement with the U.S.
Bonds are in a holding pattern with no real discernible trend. U.S. and European markets were waiting for the Fed Minutes and reacted once the Minutes were released. For the moment, expect a mild selloff. The rally in equities has been good for credit and credit tightened again last night. Expect further tightening in spreads in Australia.
Geopolitical risks remain high and still need to be monitored.