The market at present is reminiscent of a hamster on a wheel running aimlessly. Bonds rally a little, equities sell a little, bonds sell a little and equities rally a little. Either way, both bonds and equities have somehow achieved a lot in what appears to be just aimless movements.
The S&P 5OO is on track for the best quarter since 2009 and the bonds are not too far behind. And once again we are talking trade talks and a possible agreement of sorts and a Fed FOMC member talking the economy up. Today it was the Kudlow, Lighthizer, and Mnuchin show all keenly pressing the trade optimism button. New York Fed Governor John Williams told us today that policy is well positioned. Risk assets are supported by a dovish Fed and China stabilisation, well risk is, at the moment.
Notable stock events today were consumer discretionary stocks, which rose 0.6%. Volume on the exchange remains light with 6.27 million shares trading compared to a 20-day average of 7.54 billion shares.
However, despite all the optimism for risk assets, there are some worrying trends emerging. The 4th Quarter GDP was revised down to 2.2%, well below Trump’s projected 3% and despite a massive fiscal boost. Growth in the first quarter of 2019 appears to have slowed with retail sales weak, manufacturing falling, and a tepid homebuilding sector. After-tax profits without inventory and capital consumption adjustment are down 1.7%, the weakest quarter since the fourth quarter of 2017.
The story on commodities looks a little mixed as well. Palladium crashed today by 6.6% on the promise of a weak economic outlook. Oil fell as a result of Trump telling OPEC to increase production and was down 0.2% and recovered from down 1% at one stage.
Bonds were a little weaker, but this is probably profit taking to end the quarter with profits booked. The 10-year is at a 15-month low and a consolidation is to be expected. The Treasury sold $32bio of 7-year notes to strong demand.
Once again, the highest bid was 1bp below the market at the time. The successful bids were at 2.281 to 2.15%, a median of 2.24 with 67.2% accepted at the high and a bid to cover ratio of 2.54. A strong result. There is now a 71% chance of interest rate cut by December 2019.
But is the U.S. economy that bad? It’s hard to judge simply because there is definite slowing but no credit crunch, lots of liquidity and demand for high yielding assets. The market looks more like a late cycle period and can look like this for some time. Central bank dovish comments and a willingness to support risk assets means these market conditions won’t fade quickly.
Bad behaviour has certainly come at a cost for some banks. Deutsche Bank leads the way in fines with $18.3bio, RBS with $18.2bio, Credit Suisse with 13.2 bio and then at number 9 we have Commerzbank at $2.9bio. Advisory fees have also been hit.
Brexit continues to be a mess and is weighing on UK markets. The fallout from Brexit is also affecting the performance of European banks with an expected stock trading income to fall 15-20% and bond trading revenues to fall about 20%.
Equities: The S&P 500 rose 0.36% and the Dow barely was up 0.36%. The Vix closed at 14.43 while the Stoxx Europe 600 Index was down 0.12%.
Currencies: The Bloomberg Dollar index rose 0.4%. The euro fell 0.2% and the pound fell 1.0%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.39%. The 2-year is trading at 2.232% and the 30-year is at 2.819%. The U.S. curve closed on the day with the following closes 2/10 at 15.7bp, 2/30 at 58.5bp and the 10/30 closed at 42.6bp. The U.S. 5-year closed at 2.21%. The 2/5 spread is now -2.4bp. The ten-year bund closed at -0.071% and the British gilt closed at 1.001%. The 10-year yen gilt is trading -0.092%.
Commodities: WTI fell by 0.2%. while Gold fell 1.6% and palladium was down 6.6%.
Bitcoin is trading at around $4,012.
Aussie Market Today.
Equities should be bid on the day as we circle optimism back in. There may be a little end of quarter squaring which could introduce volatility. I expect a rally of sorts.
Bonds have had a great month and it is end of month today, so perhaps a little profit taking, squaring of books is to be expected. Given the composite index is up 2% for the month, a little selling won’t hurt returns too much. Expect a quiet day with a little sell-off.
The boys are back in Beijing to talk trade so maybe we will hear something out of Asia to alter the current state.