The Merry-Go-Round.

One wonders what this week brings following the confusion and sell off last week. Last week was all about trade and the S&P 500 declined a second week for the first time this year. The Nasdaq 100 slid 1% after the Trump administration suggested that Huawei Technologies may not be able to sell its products into the U.S.  The concept of theft of intellectual property and hacking Government data was one of the concerns for the Trump administration. China has asked for examples. However, to all accounts, the U.S. has not offered any examples.

Whilst the market was in the doldrums, consumer sentiment was sky high. With stocks near records, sentiment has been buoyant. And this is especially so now that Trump has postponed tariffs on Japanese and European cars and ended levies on Canadian steel and aluminium.

China remains the enigma and the waters are murky. Iron ore has performed remarkably, rising to its highest level in 5-years with spot at around $96. However, the curve is in backwardation. Bitcoin blew off 14% on Friday before settling higher at 8,044. Jeremy Corbyn walked out of cross-party talks and Theresa May agreed a timeline when she would exit as leader of the conservatives and PM.

The week’s end was all about risk off. Treasuries rallied and the dollar index reached its highest level of the year.

There appears to be a belief in equity markets that the bad news won’t stick and, equally so, after every sell off, stocks rally. The S&P has on average fallen 0.5% overnight and then rallied some 0.2% during the day since the trade spat erupted again. This gap is the greatest disparity since July 2009 (Bloomberg). The reasoning is that the swoon won’t stick. The share of Americans who expect equity prices to fall is now at its lowest level since October 2018. Greed is winning.

The new tariffs are set to impact retailers and this no doubt will impact on stocks. For many retailers the combination of competition from Amazon and tariffs this could lead to a severe downturn.

Risk assets over the week took a hit. The move lower in yields, however, was buffeted by the U.S. consumer sentiment survey which is at a 15-year high. The consumer sentiment index increased 5.3% to 102.4, the highest read since 2004. Economists were expecting 97.5. Over the week some $19.5 bio was pulled out of equities whilst $5.1 piled into bonds according to BAML. (Bank America Merrill Lynch)

The bull & bear index has fallen to 4.7, indicating that markets are somewhat neutral. Eurozone bond markets continue to rally on trade war fears and uncertainty over Brexit. French and Spanish bonds had their biggest drop in yields for 2 months falling 14 and 11 points respectively over the week.

Hong Kong Q1 GDP growth was the weakest in a decade, with first quarter growth of just 0.6%.

The Rant.

This week looks interesting in more than one sense after Trump’s message to Iran “If you want to fight, that will be the official end of your country.”  I am not sure how Trump will do this. He will need a coalition of partners and as he has alienated Europe, he won’t find too many countries willing to fight his cause. Israel looks vulnerable and so too Saudi Arabia.

Any attack on Iran will unsettle markets.  Oil logically will streak to new peaks and geopolitical risks of all kinds will climb markedly. With the elections nearing, Trump may be trying to stir his supporter base and show that he is a strong leader. However, the tactic could easily backfire should Iran receive support from either Russia or China or both.

If Trump’s strong talks are designed to bring Iran to the table, then that as tactic has worked in some sense with North Korea. However, the North Koreans seized the moment and denuclearisation of the regime has failed to materialise.

On another front, it has been revealed that Trump and Kushner were investigated by the anti-money laundering specialists within Deutsche Bank during 2016 and 2017. The specialists referred the matter to senior management suggesting that the matter be referred to the Treasury Department that polices financial crimes. The bank executives rejected the report. This news comes at an interesting point in time.

The U.S. soy farmer may lose their market share in China if the trade war continues. This loss may be permanent. Soy exports to China have fallen 74% and for the moment Brazil has taken up the slack. China is also looking to source soy beans from other sources.

Market Recap.

Equities: The S&P 500 fell 0.58%. The Dow fell 0.38%.  The Vix closed at 15.96 while the Stoxx Europe 600 Index fell 0.4%.

Currencies: The Bloomberg Dollar Index rose 0.3%. The euro fell 0.1%. The pound fell 0.6%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.393%. The 2-year is trading at 2.20% . The 30-year is at 2.825%. The U.S. curve closed on the day with the following closes 2/10 at 19.1 bp, 2/30 at 62.4 bp and the 10/30 closed at 43.1 bp. The U.S. 5-year closed at 2.176%. The 2/5 spread is now -2.5 bp. The ten-year bund closed at -0.104%. The British gilt closed at 1.034%. The 10-year yen gilt is trading -0.056%.

Commodities: WTI fell 0.2% Gold fell 0.6%. These commodities may be more expensive tomorrow given Trump’s comments.

Bitcoin is trading around $8,044.

Aussie Market Today.

With the re-election of the LNP, stocks look set to stage a rally if they can in a backdrop of global political uncertainty. I expect a rally of sorts and if anything, this could be relief rally. Geopolitics will drive the Asian markets and ultimately those markets will influence the days direction.

Unless there is a movement to risk off,  bonds should be a little weaker on the day. The currency has moved back towards $0.69 and credit remains bid. With no change in Government the bond market will now look to this weeks data to decide the direction.