Off To The Races

Off To The Races.

The big news for the weekend was not a Trump comment or even a lack of comment – it was Macron’s political win. Macron’s win eases a lot of tension within the EU and equally demonstrates that perhaps populism may be waning. Try as hard as they may the Russian hackers failed in overturning Macron and providing Le Pen with a win. Equally the win shows that people want stability and growth and common sense governments. Those governments pandering to populist ideas will now start to look increasingly redundant. European markets will no doubt be stronger today.

The U.S. markets were gifted a robust jobs report with an increase of some 211k which was a little better than expected. U.S. stocks rose to an all-time high as oil retraced some of its earlier losses. The latest jobs report provides optimism for future growth. The report does leave the door open for a rate hike in June and commentary from various Fed officials on Friday did little to change that view. The Fed will most likely now focus on price rises due to increasing wages as the market tightens. The caveat here is that many of the jobs increases are service sector related, and typically the poorer wages. It will be interesting to observe when the tightening jobs market clearly shows gains in wages across the board. For example a year or so ago, truck driver wages firmed as freight increased. Now that freight has fallen wages increase have stagnated.

The last batch of earnings have shown profitability has increased despite at times falling revenues or marginal increases. What U.S. companies have been very successful in doing has been reining in costs. Lower costs have significantly improved the current financial outlook. The danger is though that with so much attention to costs and it has been a savior for many CEO’S that lack of capex hence lower productivity will come back to haunt those companies especially if those hard won gains have been paid out by way of dividends or share buybacks. That is why so many U.S. companies and the Equity markets rallied so hard with the Trump promise of much lower taxation. It provides breathing space and perhaps the opportunity to spend on capex. My concern is that with many companies spending zero or very small amounts on capex, those companies could miss technological changes and end up in receivership at some point in the future.

Whilst the equity markets marked a solid day up, the DJ up 0.3%, and given the jobs report was a very robust number one could have expected the bonds to have sold. Bonds hardly altered. The U.S. 10 year finished the day at 2.35%. Bonds are suspicious and are opining whether there will be any significant rate rises in the future or unrestrained growth. Bonds are not optimistic that Trump can achieve the tax cuts and regulatory changes that he wants. The U.S. curve remained steady. German 10 year bunds pushed through to 0.42% and French 10 year OAT closed at 0.77%.

The U.S. Dollar Index slipped 0.2%. The pound was little changed and the euro was up 0.1%.

Commodities recovered a little. The gain was in oil which fell only 6.3% for the week after it recovered 1.5% on Friday. WTI is currently trading around $43.76 a barrel. Gold was up 0.1% and remains a flight to safety currency. Copper fell 2.6% over the week, the falls could have been greater except copper recovered about 0.8% Friday. Iron ore continues to plummet and fell 5.3% after falling 6.3% the previous day. With iron ore plummeting and the fall in oil, world growth could now be questionable. At the heart is the Chinese economy and the fall in commodity prices could be suggesting that growth has slowed considerably.

Aussie Market Today.

The big market news is Macron’s victory. Whilst his victory was not unexpected it still leaves room for a relief rally. I would expect the Aussie equity market to be buoyed by the news.  The big negative hanging over the local equity market is the slump in commodity prices. The resource sector is already under pressure and the fall in commodity prices may exacerbate the current sell off. I think for the moment though equities could be stronger across the board as a wind of uncertainty has been snuffed.

Bonds will be interesting. With little to go by on U.S. price movements Friday, bonds may well be caught up in the relief rally trigger and possibly could be weaker as equities rally on the day. I am not expecting a big move rather the move should be marginal.