Pessimists Versus Optimists.

Pessimists Versus Optimists

Sometime between Friday and Monday, China caught a cold. Not a bad cold, but a cold nonetheless. The U.S. however paints a picture of robust health so it will be interesting to watch how the cold develops. The Chinese announced their growth numbers on Monday and they were a healthy and strong 6.9%. The various Chinese indices should have rallied, right? Wrong they sold. They sold because the growth number is good and allows the Chinese Government to crackdown further on business to slow the overheated economy.

A Conference over the weekend confirmed this point of view with President Xi Jinping adding fuel to the fire talking tough.  Shenzhen slumped 5% in the early trades. The Chinese Regulator also supported their President’s stance by requesting Banks cut loans and financing to one of China’s largest developers. In the Conference mentioned earlier (held every 5 years) much was made of risk in the main speech (mentioned 31 times) and debt (28times). China wants to slow its economy without major consequences.  With a slowing economy and rebounding tensions with the U.S. over North Korea and the Trump 100 day action plan about to expire, China has a few problems. If the U.S. inflation surprises and the Fed moves more aggressively, then money will leak from China.

The U.S. is however running a different race. Rates have fallen the last couple of days on expectations that the Fed will hold rates steady. Equity markets have rallied and so too bonds. The data has been rather mixed with recent data showing evidence of a slowdown, however my pet indicator the Transport sector is roaring ahead up 17.7% year to date. The appetite for risk remains steady if not strong. The U.S. equity market will focus on earnings results over the next two weeks as companies report their results.

On the day in quiet trading the S&P closed slightly down, -0.01%, the Dow was down -0.04%, and the Stoxx 600 was up 0.9%. On the markets today 5.16 billion shares changed hands well below the daily average of 6.51 billion shares. Today marked the slowest session in the year to date.

Commodities and in particular metals rallied in response to the China GDP release of 6.9% yoy growth. Chinese steel production hit a record. China produced 72.78 million tonnes in June and cut 120 million tonnes in low grade steel capacity. Iron ore added 4.8%, copper rose 1.4% and zinc rose 1%.

Shale oil output is up for the 8th month at 5.6 million barrels per day.  Crude fell 1.2% on inventory concerns.

Brazil announced today that the U.S. could lift the ban on fresh beef imports.

Bonds rallied a couple of basis points. The U.S. 10-year treasury closed at 2.31% in 2 bp. The probability of a tightening this year is now around 49%. The 10-year benchmark European bonds rallied. The bund rallied 1bp to close 0.51% and the OAT rallied by 2 bp to close 0.84%. The gilt closed 5bp tighter to close at 1.26%. The U.S. curve was tighter by about 1.5 bp with the 2/10 closing at 95.4bp, the 2/30 closing at 154.4 and the 10/30 marginally wider to close at 158.8 out 0.2bp.

Currencies were steady.

Today marks the beginning of the Brexit divorce proceedings in what could become a rather testy period.

Toronto reported the worst house sales results for some 7 years as sales plummeted in June to the lowest level since 2010. Sales were down 15.1% from the previous month. Prices recorded the fastest 3 month decline since 1988.

The Aussie Market Today

The sluggish markets overnight could impact the Aussie equity market. Strong commodity prices should buoy the equity market. Bonds should rally as the trend appears to be better for bonds as rates are not about to rise in the short term.