Markets are placed in a delicate position. As expected on Friday with a tariff war looming, equities held back and bonds rallied. Now that a trade war has been averted for the moment, what do we need to think about?
Global growth is grabbing the attention of most folk. The European PMI is due, and economists are expecting the European PMI to dip to 54.9 in May. The PMI was weak in April and this will cause some concerns for global growth. In the U.S. next week, we have labour numbers. And traders will be scrutinising those numbers to see whether there are any signs of inflation.
Meanwhile, the push and pull of central bankers is being played out. Dallas Fed President Robert Kaplan is suggesting that the economy is already at full employment and is expecting a further two more rate hikes. Meanwhile, the ECB’s Nowatny says the ECB should be raising rates. The bottom line is rates are likely to be raised.
The economic activity of Asia is under pressure. With oil possibly creeping towards $80 a barrel, the dynamics are about to change. Bond yields are rising, and this will likely slow economic activity.
With all these headwinds, a trade spat needs to be avoided at all costs. It would appear as though the Chinese and the U.S., for the moment, have avoided an impasse. The equity market on Friday was weak as a result of problems relating to trade between China and the U.S.
Those problems appear to have been resolved for the moment. China is of concern for the U.S. But so too NAFTA with little progress having been made to date. The equity market barely moved on Friday.
The two problem children, Venezuela and Italy, are causing some concerns. However, these problems are more an inconvenience at this stage. Italian bonds and equities have weakened with the equity market down 1.5% and the bond trading at 2.22% a premium of 162 bp over the 10-year bund.
The U.S. bond market, after trading near a seven-year high, rallied on Friday. Driving some of the buying decisions were concerns over a resurgent dollar hurting commodity prices; thus, rekindling a bid for bonds.
Now that we have passed for the moment concerns over Chinese-U.S. trade, bonds are likely to weaken again.
Trump’s attempt to extricate himself from the Russian probe could cause the markets some real jitters. Trump has asked the Department of Justice to investigate whether the FBI was politicised, implying that he and his colleagues are being targeted for political reasons.
This is a very interesting development for the master of fake news. Especially in the light of FBI releases appearing to derail Hillary Clinton’s Presidential campaign. The political scenario is becoming crowded with innuendo.
Equities: The S&P 500 fell 0.2%. The Dow rose 0.1% while the Stoxx fell 0.3%.
Currencies: The Bloomberg Dollar Index rose about 0.3% while the euro fell 0.2% and the yen rose 0.1%.
Bonds: The ten-year closed around at 3.06%. The 2-year closed at 2.549% and the 30-year closed at 3.20%. The ten-year bund closed at 0.578% and the UK gilt closed at 1.449% and the OAT closed at 0.832%.
The U.S. curve closed the day with the following closes 2/10 at 50.3 bp, 2/30 at 64.6 bp and the 10/30 closed at 14.1 bp while the U.S. 5-year closed at 2.888%.
Commodities: WTI fell 0.3% and gold dipped rose 0.2%.
Bitcoin is trading around $8,560.
Aussie Market Today.
Equity market to be better bid on the day while bonds to be a little weaker as problems surrounding the trade war between China and the U.S. appear to have been averted.