Lazy Friday Afternoon

Lazy Friday Afternoon

The equity market hit new highs Friday, and much of that euphoria started earlier in the day in London. Kraft announced a takeover for Unilever and that sent equity markets running with the euphoria running into NYSE. Kraft later announced (Sunday) that the offer had been amicably withdrawn.

The other factor that helped the equity market to new highs is the expected phenomenal tax deal to be released by Trump. It is also interesting to note that the Trump Administration is now looking to calculate the Balance of Trade using a new and as yet to be announced methodology. The new methodology could exclude imports which were then exported to a third country. The methodology is going to be used to re-negotiate NAFTA and other trade deals. This is an interesting turn as many US companies make products around the globe, some of which are exported to the US and then re-exported. This would definitely inflate the balance against the US and place countries like Mexico in what appears to be a bad position. Transfer pricing will make many countries look like they have significant trade advantages against the US and this could spark a tax war between various countries. For example a manufacturer would make widgets  in Mexico which are then sold into the US export subsidiary and then shipped to Canada, making on paper at least Mexico the prime beneficiary when in fact the Export subsidiary in the USA is making the money via transfer pricing. The Detroit Office would purchase the cars and then on sell those the cars for a new price to their Canadian Subsidiary and pocket the difference. This method inflates the trade imbalance but does not recognize the ultimate party making the money. Many trading activities use this methodology and these range from commodities such as avocados and bananas to cars to skin care to oil and to a host of other products.

Bonds had a good rally. Some pundits put that down to the uncertainty of the equity market and that the economy could begin to slow when the Fed starts to raise rates. The other reason could be that Europe is scared that Le Pen could win the French Polls and initiate a Frexit, thus throwing the European Bond market into disarray. Bunds rallied 5 bp to close about 0 .3% and US treasuries rallied to 2.41. This seems to be a fear trade and will quickly retreat should the polls begin to suggest that Le pen won’t win the French Election.

Commodities were mixed to weak. Gold fell, oil fell 0.3% to $53.18 a barrel and iron ore was flat.

Aussie Market Today.

I expect that the Aussie equity market will continue with its bull run. Bonds could rally on sovereign fears and that seems the most likely outcome. The markets are really looking for news to determine the next direction. A lot is hinging on Trump’s tax plan and that will be the deal maker. The probability of a Fed rate hike in March is about 37% and for May the number is about 66%.