TRUMPS AWAY!

When the Italians finally got together to form an anti-establishment government, we jumped for joy. However, that joy was short lived when once again the man bigger than Ben Hur, Mr Trump, trumped the markets with a tariff on metal products sourced from Europe and products from Canada and Mexico.   These tariffs come into place Friday.

Meanwhile, it seems that the Koreans were falling over themselves to buy Kushner property related loans.  And property along the 38th Parallel has started to soar in anticipation of the cessation of hostilities between North Korea and the World.

This is exhausting. The net effect was that when European equities should have rallied, they fell and so too U.S equities. For equity traders, the day was not so good. For worriers about economic growth, the Trump tariffs are an impediment.

So why the tariffs? It appears that U.S. companies cannot compete. They can compete against the likes of Australia that export what really is a cottage industry amount of about $500 mio worth of goods.  And Australia, like the U.S.,  requires significant capex to make the business viable and profitable.

What Trump needs to do is encourage capex not tariffs. For too long, U.S. steel industries have paid out dividends and compensations when those funds would have been better directed towards using more efficient methods and better technology in the production of product.

Tariffs will allow U.S. companies for a moment to compete and get even fatter and lazier before those companies from Europe and Japan, for example, use technology to produce product more efficiently and more profitably. Usually tariffs never end well for the country imposing them. Without any plan, those protected industries fail some years later.

If Trump wants to make America great again then he has to lift productivity not bonuses.

So in the light of the tariff news, bonds reversed their trend upwards in yield and rallied a little. The curve flattening trade came back into vogue again. Meanwhile, those traders who believed the Fed and that over 2018 there would be four hikes have reduced their expectations.

A week ago, the probability was set at 50%; today, it is 25%. Many are concerned about growth and so they should be because any stymieing of growth means the deficit grows even more.

Continuing with the bond theme, Italian bonds had a great day. The Japanese came to town and the Italian bond salesmen partied. Kampo apparently was looking to purchase short -term bonds and with $700 bio of assets the Post Office is a serious buyer. Italian 2-year bonds have now rallied 73 bp to close at 1.26%.

The Japanese also purchased $2.57 bio of Spanish bonds. The Italian 10-year rallied 21 bp to close at 2.84% and the bund/btp spread closed from 293 bp to 250. Hopefully, Bill Gross got some of his money back.

Tariffs affected equity markets and both the Dow and the S&P shed points. Both were down. Those companies trading with Canada such as Tyson Foods lost ground with Tyson Foods falling 4%, Campbells Soup Co falling 2% and McCormick & Co falling 3%.

The EU threatened Harley Davidson with tariffs. Harley Davidson fell 2.17%. Brown Forman, a bourbon producer, fell 2.1%.  Utilities saw solid gains on the day.

Meanwhile, Deutsche Bank’s woes continue. The bank was deemed to be “troubled” by the Fed. One wonders just how much longer the bank will continue to do business in the U.S.

Recap. 

Equities: The S&P 500 fell 0.7% The Dow fell 1%. The Stoxx fell 0.6%.

Currencies: The Bloomberg Dollar Index rose 0.1% The euro rose 0.2% and the yen rose 0.1%

Bonds: The ten-year closed around at 2.84%. The 2-year closed at 2.435% and the 30-year closed at 3.025%. The ten-year bund closed at 0.355% and the UK gilt closed at 1.238% and the OAT closed at 0.671%.

The U.S. curve closed the day with the following closes 2/10 at 42.8 bp, 2/30 at 59.4 bp and the 10/30 closed at 16.5 bp. The U.S. 5-year closed at 2.70%.

Commodities: WTI fell 1.7% and gold fell 0.1%

Bitcoin is trading around $7,564.

Aussie Market Today.

Looks like a risk off day with tariffs to be imposed. Bonds should hold steady as equities will weaken. Until the full extent of tariffs are known, markets will be on edge.