Jump! Might As Well Jump.

Who said that? Well that’s what markets and central banks must be thinking, and probably any country that has a major trading partnership with the U.S. It appears as though Trump is ramping up the rhetoric and suggesting that the country needs him so that the country gets a better deal. That may be true, but the elections are in 2020, and trade is suffering.

Manufacturing fell with the Institute of Supply Managers report showing factory activity shrank in August and that was the first time since 2016. The index fell to 49.1 and the market was expecting 51.1. Complicating the outlook is the issue that the Chinese and the U.S. trade negotiators cannot even agree on a date to meet.

Complicating the issue is Brexit as Johnson struggles to unite the Conservatives.

Elsewhere Central Banks are showing concerns over the level of rates and whether there is anything to be gained should rates fall further. Globally inflation is low, however productivity is low as well and that is not helping wages and the prospect of deflation continues to play on investors’ minds.

On the day the Dow fell 1% with the trade sensitive industrials falling 1.4% and Technology fell 1.3%. Boeing continues to tumble and fell 2.7%.  The casino operators came under pressure and were down between 2% and 4%. Utilities saw gains on the day.

Treasuries have to contend with duelling FOMC members. The FOMC members are divided with some suggesting the urgency and need for rate cuts whilst others are suggesting that everything was good and that there was no need for a cut. James Bullard of the St Louis Fed is firmly of the view that a rate cut is a matter of urgency. The recent manufacturing data would suggest that Bullard has some currency.

Across the maturities, treasuries rallied. At one point the 10-year traded to 1.429% and the 2-year traded 1.46%.

The Rant.

Value investing once the darling strategy of many asset managers has now become superseded. Value investing works on the premise that you buy stocks when they are cheap. However, in the days of algo trading which is momentum based, value investing has become unloved. Stocks in general are expensive and that’s partly because of multipliers and partly because of very low risk-free rates. There will be a time when value stocks will become loved once again but now is not the time.

Market Recap.

Equities: The S&P 500 fell 0.69% The Dow fell 1.08%. The Vix closed at 19.66.

Currencies: The Bloomberg Dollar Spot Index fell 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 1.461%. The 2-year is trading at 1.452% and the 30-year is at 1.947%. The U.S. curve closed on the day with the following closes 2/10 at  0.9 bp, 2/30 at 49.5 bp and the 10/30 closed at 48.4 bp. The U.S. 5-year closed at 1.328%. The 2/5 spread is now -12.4 bp. The ten-year bund closed at -0.699% and the British gilt closed at 0.401%. The 10-year yen gilt is trading -0.28%. The 10-year OAT (France) closed at  -0.28.

Commodities: Gold rose 1.5%, WTI fell 1.8% and copper fell 0.9% per pound.

Bitcoin is trading around $10,583.

Aussie Market Today.
Stocks to remain sluggish and under pressure as trade talks appear to have stalled and events in Hong Kong are taking its toll.

Bonds look a little under pressure but really, they should be bid. Australian bonds look attractive and especially so versus European bonds where a 10-year Italian bond is now trading around 0.88%. Currently the AUD 10-year is 0.91%. Which country is AAA and is close to running a surplus?

Credit is a little wider on the day and can probably drift wider if equities don’t perform. On the day we have a number of European banks issuing. The bonds will be well bid on the day.

Geopolitical risks remain high and still need to be monitored. Watch developments out of Hong Kong as the protests have a real chance of upsetting sentiment in the region. Watch for a tweet on trade or a comment on trade out of China, either commentary will have the ability to move markets.