Politicians trump markets
Financial markets today stepped up to the plate, swung, missed and then retreated. On the day comments from Theresa May acted as a salve for the Pound and saw the pound rally the most in a day for quite some time. The main point being that the UK would remain a trading partner of Europe, would control their borders and seek to become more international. This was exactly what the currency traders wanted to hear and accordingly the Pound strengthened.
For the dollar the dollar was an enantiomer of the pound. The correlation for the dollar and equities continues. As the dollar weakened equities weakened. The reason was simply because President elect Trump spoke out about the strength of the dollar.
In all the weakness Treasuries attracted a very bid tone and had one of its best days for some time. The UST 10 traded to 2.33%. At the crux of the bond rally is a movement that perhaps Trump won’t be able to what he says he will do. On a simple matter such as tariffs, Congress has already put up an alternative that is a Tax Offset, which the Oil Industry and Koch Brothers (major Republican Donors) favour. On the subject of Health Care some 30 million are at risk and some healthcare company share prices are retreating as a result. Importantly many are now starting to worry about what Trade means for the US as people are becoming about Trumps selection for Commerce Secretary, Wilbur Ross has already unsettled some with the view that the US is a large buyer and everyone else is a small supplier. In other words it’s very much an US and Them policy.
The effect of all this means that markets are becoming more sanguine about Trump and will need to see some solid policies when he makes his inauguration speech Friday (Saturday Australian time). For example HSBC’s Major, has projected volatility for the US 10 year but ultimately sees the 10 year bond back around 1.35% later this year. Amongst the bears the range appears to be around 2.65% to 3% and we are around those levels meaning that the risk is more to the downside than the upside albeit that we could see a rise but that level may not be sustained.
For Central Banks the big issue will be to remain relevant to their masters. One could see Trump bawling Yellen via Twitter if he is in disagreement with the Federal Reserve. The current choices for Trump are virulently opposed to Regulation and Government intervention and these views could unsettle markets on occasion.
Aussie Market Today.
The Aussie dollar benefited from the weaker US Dollar. Bonds generally were better bid and I expect this trend to continue into Australia. Equities were weaker and this trend may not continue into Australia as Iron Ore was stronger overnight and this could drive interest in Aussie equities as well as give a boost to the Aussie Dollar.
Aussie bonds could see a reasonable rally and credit on the day was slightly weaker on the day. Oil rallied on the day on news that Chinese refiners are slowing production.