I WAS JOKING, RIGHT? Markets react to The Wall

In a rhetorical sense, I guess that’s exactly what Trump was suggesting when he said that he would build “The Wall” even if it meant shutting down Government. Markets reacted accordingly. Equities slumped and bonds rallied. However, in amongst the bond rally I am not sure why the bonds should rally given the risk of default just rose. I guess the betting is that a payment gets missed for a short period then payments resume and for the moment that’s not bad logic.

The real issue though which the ratings agencies appear to be missing is the commentary. How do the Ratings Agencies feel about a default or a breached debt ceiling? A recent example in Australia would suggest that they should be fearful, given they castigated Australia about the Budget impasse and that was only ever going to be transitory. For the U.S., there is not even a hint of concern and this emboldens Trump. At some point, the U.S. may stop being the Reserve currency of choice and a major shutdown could be that catalyst.

The discussion around the Government shutdown emphasises Dalio’s point in that the U.S. electorate is highly polarised. According to Dalio, about 60% of Trump voters will not change their mind no matter what Trump does. That’s exactly who Trump is appealing to and needs to if he wants to serve a second term. What the GOP and Democrats don’t get is this loyalty. Trump simply does not care or feels he can say whatever he likes. He says it’s a joke and then blame fake news, just like what he said in Arizona before going to Las Vegas to talk to the American Legion which was an entirely different speech with the fiery rhetoric removed.

For markets however, they must gauge what is happening. Simply put, Trump is still trolling his Senate House majority leader Mitch McConnell and is still at odds with Paul Ryan. I am not sure how McConnell can feel so confident about raising the debt ceiling when it is in their interests to further embarrass Trump especially as Trump is at war with the GOP. The right-wing paper Breitbart also appears to be at war with Trump and perhaps the ultra-right wing paper could be the swing factor.

What markets must contend with though are many factors that threaten to stall prices. Growth is currently supporting valuations. However, the real economic growth is outside the U.S. and the trade war that Trump finds so appealing could damage valuations of U.S. firms. The debt ceiling will be problematic later in September.  Moreover, reports that the relationship between Trump and McConnell has broken down badly raises questions about whether any changes to tax policy, infrastructure or general governing will in fact happen. Questions are certainly being raised whether anything will get done before Christmas. And this is a problem. The Trump Administration is looking more inept and unnecessarily divisive. Internally, the U.S. can live with that but for the U.S.’s allies this could prove to be a turning point especially on points such as NAFTA, the trade imbalance with South Korea and Europe.

Following Trump’s comments oil rose, the dollar fell and gold rose.


Equities fell on the day as the equity market reacted to Trump’s comments. Equity flows are now bleeding into fixed income. The Dow fell 0.4%, the S&P fell 0.3% and is now down 1.1% in August. The Stoxx 600 fell 0.5%. The transport index fell once again and that is a worrying sign for future economic growth in the U.S.

Bonds were the beneficiary of Trump’s comments. The U.S. bonds rallied and the curve flattened about 2 bp. Jackson Hole becomes now very relevant and so too Dudley’s comments about asset prices and inflation.

 The closes for the bonds were as follows. U.S 2-year closed 1.309%, 10-year 2.17%, and 30 year closed at 2.747%. The curve closes were as follows 2/10 closed 85.70bp, 2/30 143.7bp, 10/30 57.8bp. European bonds rallied about 2bp on the day. The benchmark bonds were as follows, OAT’s 0.68%, gilt’s 1.05%, and bunds closed 0.373%.

Commodities were varied. Oil rallied 1% and gold rose 0.3%. Oil rallied on the back of inventories falling. That was the eighth consecutive week where inventories fell. Russia continues to remain as the top supplier of oil to China. Copper continued its rally. Chinese imports of coal from Australia rose 4.4% in July. Nickel surged to an eight month high up 2.2%.

The Bloomberg Dollar Spot Index fell 0.2%. The yen climbed 0.6%.

Aussie Market Today

Equities could drift lower and bonds rally on the day post international developments.