Let’s Be Sober.

Here is a sobering thought.

“Treasury receipts of $225 bn in July were down $7 bn compared to last July. Corporate revenues declined by $4 bn, remittances from the Federal Reserve declined by $2 bn, and individual income and payroll taxes declined by $1 bn. Treasury paid $40.559 bn for interest on the public debt (gross) in July, the most for any July on record and up 41.5% from last July. Interest paid in the first 10 months of this fiscal year totals $455.679 bn (a record), larger than the entire deficit in 2015 ($439.093 bn).” (IFR.)

Unless the U.S economy grows more rapidly to offset the declines in remittances and increases in interest, the GOP cannot call themselves fiscally responsible and must accept the ongoing future problems that the current administration has placed upon the U.S. citizens in order to provide a lower corporate tax rate. With time, this imbalance will be a much bigger hurdle than inflation and will be far more problematic in time.

Maybe foreign investors are starting to realise the enormity of the task the Treasury faces, unlike their U.S. counterparts. Foreign investors are only taking small amounts of the long tenders, approximately $1 bio whilst the rest of the uptake is in the hands of the domestic investor.

In an equally sobering thought, Turkey comes to mind. Turkey, your right who cares?

Wrong and this is where the Trump Administration people have blundered. And instead of making America great again, they are making the U.S. isolationist, and increasingly and alarmingly so irrelevant. Why is this so? Simply put the U.S. is weaponising trade instead of using diplomatic gestures.

Turkey is at the receiving end because it put an evangelist pastor into prison for taking part in the Turkish coup some years ago. However, Turkey is finding friends in Russia and China. A bloc that includes China, Russia, Iran and Syria would isolate the Saudis and Israel.

Notwithstanding, the whole issue on trade is a debacle. The U.S. has cast aside the WTO tribunal and imposed a number of illegal initiatives that it signed up all those years ago and now threatens to destabilise the very trading platform that it helped establish and which it benefitted.

Europe, too, has issues. It is trying hard to determine who it should ally with and strangely the Russians look more appealing, even for such countries as Germany. Hungary appears to be returning to the Russian bloc.

For European banks, Turkey could be a disaster in the same manner as Greece, except possibly worse. The Turkish lira has plummeted and Erdogan seems to be controlling the Central Bank, politicising the situation with the U.S. and rapidly moving towards Russia and China. The U.S. has a major air force base there and NATO uses Turkey to fly over to support troops on the ground in Iraq. Strategically Turkey matters.

European banks have a significant exposure to Turkey unlike Greece and round of defaults along with the looming Brexit exit by the UK could splinter Europe and send growth plummeting. Yes, this is all doom and gloom but given the situation, Turkey does matter.

The ECB is particularly concerned over Uni Credit SpA. The situation in Turkey has the potential to weigh further on the euro “if the market starts to suspect that there is a significant exposure to Turkey among euro-zone firms,” said Rabobank International strategist Jane Foley.

With Brexit looming, the UK gilt curve is flattening and traders are concerned that the curve may invert signalling the start of a recession. The curve appears to be reflecting just what investors think the economy may look like after Brexit.

The latest round of inflation numbers suggest that inflation is growing. The CPI yoy to June headline rate is now 2.9% and the Fed is now expected to tighten. Inflationary pressures are mounting but these are the wrong pressures. We are not seeing wages growth, rather we are seeing pressures building at the input level.

Meanwhile, the U.S $ acts as the big disruptor for emerging market countries. The strength of the dollar is threatening to destabilise those countries leading to lower growth and ultimately weaker growth for the U.S. Amidst the turmoil of Turkey, once again the greenback is seen as a safe haven asset.

Market Recap.

Equities: The S&P fell 0.7%. The Dow fell 0.77%. The Stoxx 600 fell 1.1%. Vix closed 13.16.

Currencies: The Bloomberg Dollar Index rose 0.7% and the euro fell 0.1%.

Bonds: The ten-year closed around at 2.87%. The 2-year closed at 2.608% and the 30-year closed at 3.03%. The ten-year bund closed at 0.319% and the UK gilt closed at 1.244% and the OAT closed at 0.672%.

The U.S. curve closed the day with the following closes 2/10 at 26.5 bp, 2/30 at 42.2 bp and the 10/30 closed at 15.5 bp. The U.S. 5-year closed at 2.746%.

Commodities: WTI rose 1.2%. Gold fell 0.1%. The Bloomberg Commodity Index fell 2.3%.

Bitcoin is trading around $6353.

Aussie Market Today.

Equity markets should be slightly weaker on the day. Bonds should also rally on the day as concerns over tariffs mount. Continue to monitor the tariff outlook rhetoric. China will continue to have a strong influence on the direction in Asia and ultimately Australia.

The Aussie dollar looks to be under pressure however the relief valve remains in the form of bond rates.

Geopolitical risks remain high.