A Lot of Bluster About Not Much

A Lot of Bluster About Not Much.

That headline pretty much sums up the day’s trading. It’s as if many of the NYC set were still in the Hampton’s directing their minions what they wanted done on the day and that was that. Volumes in both equity and bond markets were down and trading volumes were thin.

The big news for the day were the Fed Minutes and the U.S. reaction to North Korea’s successful launch of its new ICBM. The news out of the Minutes highlighted the Fed’s concern over the subdued market volatility (read Vix) and news that the Fed taper could commence in September.

If the tapering were to commence in September this would mean that there won’t be a rate hike for a while. Yellen is keen to get the tapering into effect. This would also then allow an orderly transition for Yellen’s replacement should that be required. Given the stance by a number of voting members of the Fed’s Open Market Committee, this would then probably mean no rate hikes until at least December. Currently the probability of a Fed hike in December is about 54% with only a 3.1% chance in July. September stands at 26%.

The other interesting piece in the Minutes was the reference to the Vix. The Fed is saying a lot about the Vix and this would suggest that the Fed is concerned about asset valuations. This view is probably supported that many U.S. companies are somewhat bloated with debt and would be vulnerable should rates increase. Instead of putting debt to use, many corporates have used debt to bolster dividend payouts and share buybacks, policies that concerns the Fed.

What was interesting about the Fed Minutes was the split over the outlook for inflation. The concern is that inflation appears to be falling away from the Fed’s target of 2%.

Following the release of the Minutes, the equity markets staged a recovery for the day. The Dow fell marginally down 0.01%, the S&P rose 0.15% and the Nasdaq was up 0.67%. The Stoxx 600 gained 0.2%.

The USD was slightly stronger on the day.

The big movements were once again in commodities. Wheat prices are being whipsawed on meteorological data as it appears the prospects of a drought in the U.S deepen. (Funny how they listen to this climate science) WTI futures were crushed, down 4.1%. The oil glut persists and there are reports that Armco (Saudi Government Oil Company) was heavily discounting various grades of crude to increase sales and hopefully reduce the glut. Oil looks to be in a perilous position as pressure from the Saudis could cause Qatar to open up its gas fields to a number of suitors thus increasing the availability of gas. Such a move would hurt the U.S. drillers and could precipitate a problem within the U.S. as many of these drillers are sub investment grade and with oil around $38 they then become problematic. A meltdown in credit spreads in the sub investment grade could impact spreads generally. Copper posted its biggest loss in 2 weeks down 0.6%. Zinc was lower by 0.43%and tin fell 1%.

Bonds were somewhat weaker in the morning pre, the release of the Minutes. Following the release, bonds rallied a couple of basis points. The 10-year U.S. treasury rallied 2 bpo to close at 2.32%, the 2-year closed at 1.41% in about 1 bp. The curve flattened slightly with the 2/10 closing at 91.7bp in 1.9bp, the 2//30 closed at 144.10 in about 1 bp and the 10/30 pushed out 1 bp to close 52.2bp. The UK 10-year closed steady at 1.258% the bund was unchanged at 0.44% and the French 10-year widened 1 bp to close at 0.8%.

There is a report on Reuters that suggests that the U.S. Bureau of Labor Statistics is due to release its monthly employment numbers on July 7, the report is expected to show some 73,500 positions have been lost in retail. The Reuters report also has suggested that over the next decade some 600,000 jobs could be lost from retail as e-commerce replaces bricks and mortar stores. Many retail stores look set to go into bankruptcy. True Religion Brand Jeans filed for Chapter 11 on Wednesday as it was unable to slash its debt and cope with lagging sales. Walmart is experimenting with robotic distribution and automated checkouts.

The G20 Summit meetings start later this week. Be watchful over news. It will be interesting to see how Europe treats Trump and whether Europe and China go their separate ways with free trade, especially in the context of the U.S. threatening trade with China over its ability to reign in North Korea. It is also interesting to note that Russia has weighed in saying that any further embargoes and sanctions are not acceptable.  It’s all about to get interesting again.

There was report reported on by the BBC last night that stated that the Saudi’s were the ‘chief promoter of UK extremism’. If true this makes a mockery of Trump, his support and sales of weapons to the Saudi’s and the Saudi allegation of terrorism charges related to Qatar.

The Aussie Market Today

Geopolitical risks aside, the Aussie equity market should be reasonably solid. Bonds can rally a little. For Australia, it is important to watch the outcome of the G20 because as a major trading nation and exporter free trade is vital for our economic growth. Any policies that the U.S. implements against China will hurt as China represents about 27% of our exports.