On Sunday, Mnuchin spoke on a Fox news programme and suggested that he was having detailed discussions with China about all things trade. This was just the catalyst that the U.S. equity market required to kick start what at the time was a sick equity market. Traders gave a hurrah and then plunged into a buying spree that led the S&P 500 up 2.74%.
But before we get too carried away on what was a great day for equity investors, spare a thought for GE. GE was one of the few stocks that failed to ignite in today’s rally. Since early 2000, when the stock was the largest company globally at around $600 bio it has fallen almost $500 bio. Today the stock is valued at $111.9 bio and is close to falling out of the Dow as it is the lowest capitalised company in the Dow.
Equity markets are picking a winner here and given Trump’s erratic style we may be in for some more days of disappointment. The Korean acquiesced pretty quickly. However, China remains firm and is seeking to engage in more meaningful discussions.
Europe remains outside discussions and wants fairer treatment. These discussions are not going to go away quickly, nor are they much different to previous trade discussions. It’s just that Trump is being more transparent and his Administration a little more bellicose.
The challenges are still there. The equity market remains overvalued on a CAPE basis and also on a forward PE basis. It is hard to see where the next pieces of value are going to come from. However, markets are what they are, and the equity market looks comfortable. How the equity market reacts to rising interest rates will be a different story.
This week we are likely to see the most amount of issuance ever taken by the Treasury. Some $294 bio has been slated to be issued this week in bills and treasuries. Accordingly, bonds have weakened as yields drifted higher.
Investor preferences may ultimately decide the future fate of the markets. You see, central banks are starting to bet that the U.S. dollar is not what it once was and are now investing in other currencies. The euro is a large beneficiary. And as talks escalate about trade wars, the $11.3 tr of world reserves are starting to shift. To date, we have seen some $500 bio exchanged for euros and that trend is likely to continue.
Developing countries are reallocating and so too countries such as China, Brazil, India, South Korea, Taiwan and Saudi Arabia. About 64% of the global reserves are currently in dollars and this has helped U.S. companies to borrow cheaper than their counterparts and because most trade is in dollars, avoid currency translation risks. This advantage may change or diminish.
The euro is seen as the next major global currency and money is most certainly flowing in that direction. The euro currently accounts for about 20% of official currency reserves. The problem for the dollar is as the risk of trade spats continue, both Europe and Asia are forging closer trade ties. As these bonds develop, demand for Euro will only increase.
The euro has come a long way and appears to have recovered from its stumbles in 2009 and the Greek saga. In 2016, Brazil held no euros ( 10th largest currency reserves), Saudi Arabia held just 10% ( 4th largest ). These countries are now building their reserves.
Equities: The S&P 500 rose 2.72%. The Dow rose 2.84% and the Stoxx 600 fell 0.7%. The Vix closed at 21.
Currencies: The Bloomberg Dollar Spot Index fell 0.4%. The euro rose 0.8%. The pound soared 0.7%
Bonds: The ten-year closed around at 2.85%. The 2-year closed at 2.275% and the 30-year closed at 3.085%. The ten-year bund closed at 0.524 and the UK gilt closed at 1.443% and the OAT closed at 0.758%. The U.S. curve closed 2/10 at 57.7 bp, 2/30 at 81.1 bp and the 10/30, closed at 23.2 bp. The U.S. 5-year closed at 2.64.
Commodities: Gold rose 0.4%. Copper fell 0.4%
Bitcoin is trading around $7894.
Aussie Market Today.
The Aussie equity market will rally today taking the lead from the U.S. and a possible cessation of tariffs.
Bonds are likely to drift and probably higher in yield. With a large refunding and funding occurring this week in the U.S., all eyes will be on how those auctions fare. Given the size of the auctions and expected falling demand, yields will have to rise to attract buyers. All bets are off, of course, if the Trump administration reverse direction and seeks to impose tariffs.
The Aussie bond market is not immune to the U.S. bond market rises and will drift higher if the U.S. moves higher. It is also worth noting that as the U.S. rates and yield rise, the cost of funding for Aussie banks also rises. If this trend continues then mortgage rates are likely to rise.