Now for a holiday.

Monday will see markets in the U.S. closed for Memorial Day and this goes part way to explain Friday’s activities. With a long weekend looming, stock and bond markets were relatively quiet. Stocks rose but that could have been profit taking by shorters or squaring positions. The risk was that Trump was meeting Abe over the weekend and who knows what he would say to the Japanese he would say to the Japanese Prime Minister.

As it turns out, Abe feted Trump with burgers chips and golf games in the hope that Trump would not look to impose tariffs on Japan. Trump was in a ribald mood with the Japanese car manufacturers. However, Akio Toyoda the current President of Toyota was in no joking mood and suggested to Trump that his complaint about Japanese car manufacturers was without merit. Toyota, after all has invested billions and employs a significant number of U.S. workers and these investments could be at risk if tariffs are applied.

For the markets, however, it’s a slow grind. The “aha” moment will be one day as a collective people wake up and start to understand the complexity of a trade agreement and how difficult they are to negotiate. A simple trade item could take several thousand pages to document and a long time to negotiate if what I am told by a Trade Commissioner is correct.

This trade / tariff war will take quite some time to resolve and for China if they get frustrated, they can and will just wait out Trump’s term whether that ends in 2020 or 2024. Time is on their side. Meanwhile, the IMF is downgrading global growth forecasts and all of a sudden equity prices look fully valued. For a rally to continue, we need to see revenue growth or profit increase which at the moment seems a distant pipedream.

Stock and bond markets  will have to wrestle with the scenario of slowing economic activity, (weak manufacturing orders U.S. and weak consumer confidence Germany) and slowing growth. The S&P 500 Index saw its third straight weekly decline. The Dow saw its fifth consecutive weekly decline, the longest streak since 2011. Over the week the Dow fell 0.68% the S&P slipped 1.16% and the Nasdaq fell 2.29%. On Friday, about 5.37 bio shares were traded on the exchanges versus a 20-day average of 6.94 bio shares. Utilities and real estate led the way.

Bearish sentiment is starting to gain some form of a foothold. Bullish sentiment is low, with AAI reporting sentiment fell 5.1% to 24.7%. This is the lowest read for some time and is closing rapidly on the low in December 2018 which was 20.9%. The historical average is 38.5%. Neutral sentiment was the big winner up 8.3%.

Bonds were in a similar position to equities. On Friday, we saw some profit taking in a thinly traded market. For the moment, risks are skewed towards an escalating trade war, risk off and lower yields. The Huawei ban has unsettled business and especially U.S. tech companies and export dependent multinationals. China is an important part of the logistics supply chain and replacing such will not be easy.

With Theresa May’s demise, Boris Johnson appears to be the bookies favourite to replace May and his rhetoric provides cause for concern. Johnson believes that Britain should leave the EU bloc without a deal and this move, in his opinion, will force the EU to offer a better deal. This uncertainty is good for treasuries and risk off trades. New orders for U.S. made capital goods fell more than expected in April. Durable goods fell 2.1% and motor vehicles fell 3.4%  while orders for non-defence aircraft collapsed 25.1%. (The Boeing Max 737 jetliner was the major contributor as production has been cut and deliveries suspended).

Amidst uncertainty govies have performed.  Eurozone bonds are near a 2 ½ year low as demand for safe assets increase. This is also assisted by the ECB which is reinvesting the proceeds from maturing bonds. Bunds look a safe bet until the ECB announces a balance sheet reduction plan and in the current uncertainty and climate, that is unlikely for a while.

Market Recap.

Equities: The S&P 500 rose 0.14% and the Dow rose 0.37%.  The Vix closed at 15.85 while the Stoxx Europe 600 Index rose 0.6%.

Currencies: The Bloomberg Dollar Index fell 0.2% while the euro rose 0.3% and the pound rose 0.4% and the yen gained 0.3%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.324% while the 2-year is trading at 2.168% and the 30-year is at 2.752%. The U.S. curve closed on the day with the following closes 2/10 at 15.4 bp, 2/30 at 58.3 bp and the 10/30 closed at 42.7 bp. The U.S. 5-year closed at 2.122%. The 2/5 spread is now -4.7 bp. The ten-year bund closed at -0.117% and the British gilt closed at 0.955%. The 10-year yen gilt is trading -0.059%.

Commodities: WTI rose 1.6%. Oil rose as supply risks continue. Iran could be set to become a little more aggressive as the U.S. commits an additional 1,500 troops to the region. Tensions in the Gulf and Middle East are rapidly increasing. Inventories are still an issue as U.S. crude inventories are at their highest since July 2017. Geopolitical tensions are driving the price at present. Gold gained 0.1%.

Bitcoin is trading around $8,578.

Aussie Market Today.

We appear to be in a risk off period and with the U.S. closed Monday markets should be thin. The trade talks are going nowhere, and this may allow Asian markets to continue selling. Shares should open steady on the day.

Bonds should be steady on the day. All eyes will be focussed on any commentary from the RBA regarding interest rates. Following Lowe’s recent comments, the market is looking for a rate cut. Some participants believe rates could be cut 75 bp over the year with Westpac leading the charge. Westpac expects three cuts over the year. If true, the recent election was not a good one to win. And if true then there are significant problems that could arise in employment, wages growth and economic growth. The currency looks extremely vulnerable.

Short dated credit remains on the bid.

Demand for credit in the shorter terms appears to be well bid and this trend should continue for a little while as investors prepare for the RBA’s June Board meeting and whether monetary policy will be adjusted.