Today saw stocks surge towards the close on a day where stocks were mostly down. The rally has and is boosting optimism for stocks as optimism over global growth increases. Sovereign bonds have not fared that well and have fallen in price as risk assets have gained.
Facebook was in the news again and once again for the wrong reason. Apparently, Facebook user details were found on cloud computing servers after Facebook posted details on Amazon.com Inc’s servers in plain sight. Facebook fell 0.4% on the news.
The S&P 500 was positive for the fifth consecutive day because Bloomberg reported that the deal the U.S. and China are detailing would allow Chinese companies to meet their commitments on commodities by 2025 and U.S. companies would be allowed to own enterprises in China without a Chinese partner. Trade matters and it’s the chance that the U.S. and China could come to an arrangement that is boosting optimism.
On the other side, however, what Trump giveth, Trump taketh it away. Whilst there is optimism around China, Trump’s insistence on closing the Mexican border may actually cause a bigger headache. Even Trump’s most avid fan, Mitch McConnell, is horrified at the suggestion and has posed real concerns.
Some $5bio of goods cross the border each day and if the border were to close the automakers would be out of business in about 90 days. Such is the importance of trade flows between the U.S. and Mexico. Its been a bad week for McConnell, first an improved healthcare bill that he has already said not on his watch and now the border. The Republicans are now scrambling as a result. Any closing of the border for a period of time will be very damaging to the U.S. economy.
The ADP National Employment Report showed U.S. private employers added fewer jobs than expected and were below economists’ expectations, adding only 129,000 jobs. The release caused a pause in stocks which were then boosted by news on trade.
The ADP numbers on another day may have sparked a rally but today that was not the case. The trade deal was once again prominent in the traders’ thoughts after Kudlow gave some indications that the U.S. may be moving closer to a deal with China. What the ADP numbers did do was limit the selling as questions still hang over the economy.
The junk bond market is helping the optimism in stocks. Junk has had a good run recently and given the good correlation between junk and stocks, stocks look set to make further gains. The recent actions by the Fed by not letting bonds roll off its balance sheet (soon) allowing treasuries to rally has provided a nice tailwind for risky assets. The demand for yield is strong and that demand is translating into demand for junk.
Credit high grade and junk and stocks are all in a similar place and each is pointing the finger at the other as to why they are rallying, even though the economic cycle suggests slower growth. In the absence of a catalyst to change the current thinking and an economy that is at the lower end of the Goldilocks zone, it appears as though junk’s buoyant run will continue. And as junk rallies, stocks will rally and that will pull high-grade credit along for the ride.
The Brexit conundrum continues. The strength of gilts reflects the poor performance of British stocks. However, the performance is not that bad. Yes, it’s the worst performer in Europe up only 10% alongside Spain. However, that’s still a decent return for an investor.
Equities: The S&P 500 rose 0.2%. The Dow rose 0.15%. The Vix closed at 13.74. The Stoxx Europe 600 Index rose 1%.
Currencies: The Bloomberg Dollar index fell 0.1%. The euro rose 0.3%, and the pound gained 0.3%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.526%. The 2-year is trading at 2.34% and the 30-year is at 2.935%. The U.S. curve closed on the day with the following closes 2/10 at 18.3 bp, 2/30 at 59.3 bp and the 10/30 closed at 40.8 bp. The U.S. 5-year closed at 2.33%. The 2/5 spread is now -1.3 bp. The ten-year bund closed at 0.001% and the British gilt closed at 1.088%. The 10-year yen gilt is trading -0.047%.
Commodities: WTI fell by 0.3%. Gold fell 0.2%.
Bitcoin is trading around $5,280.
Aussie Market Today.
It’s a risk on day. Now that the equity market has recovered from the yawn of the Budget, stocks can now rally further. Asia should be buoyed by Kudlow’s comments and that will be the catalyst for today. But beware, the caveat as always is this could easily reverse if bad news is announced.
Bonds are likely to retrace for a little while as the trend for higher yields appears to be set. Demand for risk is increasing as concerns over global growth wane. Should Trump close the Mexican border, bonds will rally so watch for that news. On the credit side, demand continues and will continue as demand for risk increases.