All quiet.

Markets are relatively quiet ahead of the 4 July holiday. In the stock market, trading volumes were down some 17% and Nasdaq volumes were down 22%.

The big news is set to come later this week. However, the effects if a tariff war is enabled will take some time to be felt. In the meantime, the stock market shrugged off future fears to push marginally ahead on the day.

Elsewhere,  the weaker than expected manufacturing data for June in China sent shivers down into emerging market stocks. The MSCI Asia Pacific Index hit a 10-month low. The yuan softened. The markets are lurching towards an inevitable showdown between two major players and no one knows what to do at this stage.

What we do know, however, is that the threat of a trade war is certainly weighing on European Manufacturers. The problem is also weighing in on European junk bond issuers where a repricing of both risk and documentation is expected to take place.

An interesting dichotomy is arising between U.S. stock sectors, correlation and volatility. The CBOE shows the correlation between the consistent sectors and headline index are higher and volatility has jumped. This should come as no surprise.

However, the concern relates to implied and realised volatility. Implied volatility has averaged 14.6% over the past 5 years and is now about 15.6%. Realised volatility has moved from 8.14% last year to 19.95%. This movement would suggest that investors are becoming more cautious about how much longer the expansion can continue. Investors should expect greater churn across sectors leading to rotational increases and stock dispersion.

Anxiety over tariffs, economic outlook and possible equity underperformance are factors driving bond investors towards a flatter yield curve. The flat yield curve is at its flattest in over a decade (Reuters). The 5/30 yield curve hit 22.8bp on Friday and that was the flattest since July 2007. This is creating some safe-haven demand and helped pare back losses in the year to date returns for bonds to 1.08%.

In other news, Trump threatening to withdraw from the WTO if Europe imposes trade tariffs in response to the U.S. applying tariffs on European goods. Apparently, there is a draft proposal that allows Trump to raise tariffs at will and negotiate special tariff rates with specific countries, both basic violations of WTO rules.

The EU is arguing that such a proposal would be disastrous and lead to some 120,000 lost jobs in the U.S. auto sector or 420,000 jobs if car dealerships and car part retailers are included. It was calculated by the auto industry that a 25% tariff would have a negative impact on the U.S. GDP of about $13-14 bio with no improvement in the current account.

Europe breathed a sigh of relief when Merkel reached agreements with her counterparts and remains in power.

On other news, both Goldman Sachs and Morgan Stanley are able to maintain their current dividend payout despite failing the Fed stress test. The unprecedented move would have allowed both to avoid cutting their respective payouts by half. This is the first of a kind for some 8 years and marks a change in Washington.


Equities: The S&P rose 0.3%. The Dow rose 0.15%. The Stoxx 600 fell 0.8%.

Currencies: The Bloomberg Dollar Index rose 0.5%. The euro fell 0.6%

Bonds: The ten-year closed around at 2.871%. The 2-year closed at 2.553% and the 30-year closed at 2.993%. The ten-year bund closed at 0.303% and the UK gilt closed at 1.253% and the OAT closed at 0.599%.

The U.S. curve closed the day with the following closes 2/10 at 31.4 bp, 2/30 at 44 bp and the 10/30 closed at 12.2 bp. The U.S. 5-year closed at 2.756%.  The U.S. yield curve flattened on the day.

Commodities: WTI fell 0.3%. Gold fell 0.91%. Copper fell 0.71% and silver fell 2%.

Commodities had a bad day with the Bloomberg Commodity Index falling 1.9%.

Bitcoin is trading around $6,625.

Aussie Market Today.

Markets are quiet, and the Aussie dollar is slipping on weaker commodities, slowing Chinese economic data and threats of trade wars. No large movements are expected, and the equity market looks likely to drift.

Bonds should remain in a tight trading pattern with a chance of trading weaker.

Geopolitical risks remain high.