Oh What a Day.

Almost September and summer holidays are in full swing and markets are just humming showing no fear of anything. Today marked the first time that the Nasdaq had moved a 1000 points in the quickest time.

Trump appears to have signed a bilateral trade agreement with Mexico, thus opening the way for a bilateral with Canada should Canada wish to enter trade talks. The equity market just skipped along forgetting all the potential problems Trump could possibly face in the medium term. It appears as though the market will rally unless confronted with a problem.

With Labor Day just around the corner, expect a pickup in IG issuance and therefore a little bit of movement in bonds and swap. Three month OIS rose a little on the day, now 2.0934%. However, there is a bit of movement to be expected if the Fed Fund’s target rate corridor of 2.00%- 2.25% is to be reached.

Bonds on the day started to focus on the German IFO number and that helped to move the mood towards selling bunds. However, the real selling started when the U.S. based accounts entered the market. The catalyst for some of the selling was seen as the treasury supply which is currently flooding the market.

Also looming large in the month of September is the expected issuance of HG credit, expected to be in the order of $120 bio. The current levels may end up looking attractive should trade fears arise again. The Mexican deal gives some hope of avoiding a trade war but it does not mean the end of the various trade spats the Trump administration has. For the moment though the bond market looks range bound.

In what I believe is a first or extremely rare incident, a number of U.S. States are specifically cautioning bond investors about trade related consequences in documents released for new bond sales. For example, Washington State cited “International trade policy uncertainty” in its disclosure documents for its $502 mio general obligation bond sale this week.

Washington State exports some $90.4 largely going to Canada, China, and Japan. This follows after Moody’s increased vigilance on the States over trade. Specifically, they have called out west coast states Texas, Louisiana, Iowa, Kansas, Nebraska, and North Dakota as being vulnerable.

In an interesting study out of the San Francisco Fed, there is a research paper that goes some way to debunking the theory that an inverted yield curve causes recession. By obtaining an expectations only spread between short term and longer dated securities, they found that inversion signals high recession risk whether it stems from a low term premium or low short rate expectations holding down longer term rates.

The San Francisco Fed also tried to look at the current levels and found that the curve was difficult to use as a predictor. This is because they were unsure how much an effect the bond buying programme had on rates and the low term premiums may have contributed in the past to overheating and quantitative easing could heighten the recession risk. The final comment was something like this “great caution is therefore warranted in interpreting the predictive evidence.”

The stock market for the moment is confident that the trade war is close to ending. Therefore, that’s the reason for the rally. The shares of the carmakers surged today in response to the Mexican news. Remembering that many cars are manufactured in Mexico and the car makers stood to lose a lot under tariffs.

Market Recap.

Equities: The S&P rose 0.76% The Dow rose 1.0%. The Stoxx 600 rose 0.5%. The Vix closed 12.16.

Currencies: The Bloomberg Dollar Index fell 0.4%, the yen rose 0.1%. and the euro rose 0.1%.

Bonds: The ten-year closed around at 2.846%. The 2-year closed at 2.645% and the 30-year closed at 2.9%. The ten-year bund closed at 0.376% and the OAT closed at 0.716%.

The U.S. curve closed on the day with the following closes 2/10 at 20.1 bp, 2/30 at 34.90 bp and the 10/30 closed at 14.60 bp. The U.S. 5-year closed at 2.74%.

Commodities: Crude rose 0.2%. Gold was steady up 0.2%.

Bitcoin is trading around $6,735.

Aussie Market Today.

The lead for the equity market will come from Asia. However, given offshore movements, expect the equity market to have a solid rally on the day.

Bonds are likely to be sold today as it’s a risk on day. The prospect of tariffs are always a concern but for the moment expect a small sell off.

Geopolitical risks remain high.