Have Markets Signed A Faustian Pact With Trump?
Equity markets have rallied since Trump won office on the premise of deregulation, fiscal stimulus and infrastructure projects. Since then Trump has actively campaigned against the strong dollar (which is a good thing), harangued the Fed Chair Yellen, castigated a number of US Corporates and has bullied and lambasted friends of the USA. It helps little to create confusion in NATO, suggest an invasion of Mexico, and upset major allies. What business wants is stability, policy, and how Trump will assist productivity to rise. Will Trump for instance give further tax breaks for capex? Nothing has been revealed to date. Markets like consistency.
So what are Managers now doing? It would appear that investors are now sitting back and looking at valuations. What some smart money has been doing is buying commodities and that immunises returns from the Trump twitter company attacks, and means that the investor will benefit when infrastructure spending commences. Copper for instance has been a beneficiary.
The bonds are in their own bubble for the moment. After a shell shocked December, bonds have settled a little and the trading range is set for the moment. The range on the 10 year treasury appears to be 2.35% to 2.60%. The yield curve suggests that long term expectations remain in place however the curve between the front end and 10 years suggest that the market is expecting strong growth and for some inflationary pressures. This view is consistent with the Fed and the Fed’s portfolio. It is estimated that the Fed’s $4tr portfolio has shortened in duration by about 1 year as maturities roll off. This has the impact of taking money out of buying long end bonds placing pressure on those assets thus causing demand to fall. That means rates go higher!
So today we saw the 10 year bond retracing to 2.50% before closing at 2.48%, equities fell a little to close virtually unchanged, oil retreated on the need to implement more cuts in production to meet lower quotas. The dollar was weaker paring the earlier gains. The dollar fall is confusing as the fundamentals suggest that the dollar should be higher. Political uncertainty, political risk and lack of certainty in policy is causing the slide. Meanwhile the markets are waiting for Friday’s Jobs Report. The expectations are for about 175k and in essence the market will also be focusing on any wage increases and hours worked. Bunds were stronger on the day with the benchmark bund falling 4 points to 0.43%. Gilts were stronger rallying seven basis points to 1.38% after Carney warned of surprises ahead of Brexit.
Commodities were mixed for the day. Sugar was strong oil declined, metals were mostly mixed, and softs were generally stronger.
Aussie Market Today.
Markets are slightly out of sorts today with a rather muted equity market. Bonds were slightly softer in the US treasury market and European Bonds were stronger. I expect that in a quiet market equities could drift, and bonds will take their direction from Treasuries and be slightly weaker on the day. I expect the markets to be quiet today.