Here’s to the good old spaghetti western where the goodie is mysterious and the bad are bad. And that’s how the market feels at present. The equity market soured overnight and the culprits – the baddies were two fold – one being Italy and the other China.
China is easy to understand. First, there is the trade stuff then there was the alleged implanting of microchips. And now there is the Chinese stock market. The Chinese stock market has stalled and is now down some 30% since its highs in January. The stalling market and Taiwanese tech stocks tumbling led to U.S. tech falling and with it the U.S. stock market. Some firms also missed earnings and with a weaker housing market combined with the prospect of rising interest rates the equity market stumbled again. The equity market is lurching like a drunkard and will need some good news soon.
It was not only U.S. stocks that were hit. Weak reporting from SAP set the Europeans on a weaker path and the EC’s comments that Italy was in serious breach of budget rules. The fate of Khashoggi continued to also weigh on the market. With all of this action the dollar rallied, the safe-haven yen rallied and oil fell on concerns of slowing demand and trade issues. Metals slid on concern over Chinese growth and copper fell 1.4%. Three month nickel also plunged 0.65%. Brent was down 0.87%.
The other baddie is the Italian Government. The Italians are causing a crisis in the EU of their own making. The Government has a spendthrift’s gleam and is not about to follow EU budget rules just yet. The deficit is rising at a time when the EU says it should be falling. The Government has announced a number of spending measures that include a boost to welfare, and cutting the retirement age. This uncertainty is leading to risk off and a move back to the EU most favoured bond, the German bund. The bunds rallied with the 10-year closing about 0.41% compared to the Italian 10-year at 3.74%. We are living in a period of uncertainty.
In the U.S., the treasuries were king again and staged a neat little rally as risk once again was taken off the table all to the chagrin of the shorters – just when they thought they were onto a good thing. And this was on a day when bonds should have sold for various reasons.
On the day, we had the ECB warn the market about undermining budget rules and bearish comments from the Fed. On the other side, we had Mnuchin saying he was not attending the investment summit in Saudi Arabia. Concerns were also being voiced by some market sectors about the impact of higher rates on corporate profits (what’s new?). And in the end, the bulls won and the bears were left to lick their wounds. Next week the Treasury will issue $108 bio in 2-year, 5-year and 7-year treasuries.
Equities: The S&P was down 1.44% and the Dow 1.27%. The Stoxx fell 0.5% while the Vix closed at 20.06.
Currencies: The Bloomberg Dollar Index rose 0.4% and the yen rose 0.4% while the euro fell 0.4%.
Bonds: The ten-year closed around at 3.177%. The 2-year closed at 2.874% and the 30-year closed at 3.363%. The ten-year bund closed at 0.41% and the OAT closed at 0.801%. The U.S. curve closed on the day with the following closes 2/10 at 30.1 bp, 2/30 at 48.5 bp and the 10/30 closed at 18.3 bp. The U.S. 5-year closed at 3.025%.
Commodities: WTI fell 1.5% while Gold rose 0.1% and copper fell 1.4%.
Bitcoin is trading at around U$6,370.
Aussie Market Today.
Equities, just sell. The trend from Asia and, in particular, China is not heartening and given the reaction last night, markets appear to be heading towards risk off again. Be wary but with the weekend a few hours away and the offshore markets in sell mode, the stocks on the ASX will probably sell off today.
If we are in risk off mode and that appears to be the case, buy bonds. That’s the trend and as they say the trend is your friend.
The Aussie remains vulnerable as the interest differential between here and the U.S. remains negative and with a drought and a possible slowing of the economy. The AUD looks vulnerable as a trend. An uptick in commodities will help but a strong dollar could slow that move.
The direction for markets appears to be strongly influenced by Asia. Look north for some guidance.
Geopolitical risks remain high.